How does an LLC guarantee a debt?


1

In regards to LLC protection, if you are the only person in the company and personally guarantee a loan, your assets are not protected if you default. What is the other method of guaranteeing the loan in which the LLC is responsible for default and not you?

LLC Legal Legal Entity

asked Nov 28 '12 at 02:58
Blank
4th Space
125 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans

1 Answer


3

Some terminology here:

A "Guarantor" is basically a co-signer on a loan -- he effectively says "if the person borrowing the money doesn't pay, I will."

If a bank is lending money to a company without significant assets or a long track record, it's common for the bank to ask the owners of the company to guarantee the loan. The bank doesn't want to take the risk of the company going out of business and not being able to collect on the loan.

That's probably what's happening here -- you have a single-member LLC and want the LLC to take out the loan, so you won't be liable for it if the LLC can't pay the money back. But, nobody will lend the money to you on those terms. (Note that the fact that you're an LLC is irrelevant here -- the same problem crops up in corporations as well.)

Note that if a loan is guaranteed, the original borrower is STILL liable for the debt -- it's just that there's now a second party who the lender can go after.

So, in answer to your question, the "other way" is not to personally guarantee the loan.

There are alternatives. The main alternative is to pledge collateral; that way, if the debt isn't paid, the bank gets some property. If, for example, you spend the money to buy a forklift, the bank can take the forklift. Or, if you have a patent portfolio, the bank can take that. Another alternative is to only guarantee a set amount of the debt -- it's a $100,000 loan, but you're only responsible for $50K of it. Another alternative is to have a higher interest rate -- if the lender will only lend the LLC $100,000 at 4% with a guarantee, maybe it will lend it at 14% without the guarantee. (That option is less likely with banks.)

answered Nov 28 '12 at 03:29
Blank
Chris Fulmer
2,849 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

LLC Legal Legal Entity