Someone explain LLC to me

[kevin_b.2]

<p>I am currently the owner of a sole proprietorship business. I am under the assumption that I might be able to upgrade to an LLC. What I want to do is take out a business loan for some startup capital. Currently I am funding my business through my FT job. If I am able to become an LLC and I end up failing at the business, will that protect me from paying back the business loan, or even partially?<br>

Is there anything like this? </p>

[Jerry_]

<p>You need to consult with a CPA in your local area. It's a bit <em>like fraud</em> if you have a goal of getting a loan and knowing you may not pay it back....</p>

<p> </p>

[Spearhead]

<p>Right. So you are asking, is LLC a "Get out of debt free card"?</p>

[kevin_b.2]

<p>somewhat, i just need some kind of protection, not to mention a way to raise some capital. in germany there is a way for a company like an LLC to get a loan but only for the amount the company is good for (like a deposit, for emergency purposes like a default). I am wondering if that is what an LLC is like.</p>

[mike dixon]

Setting up your business so you don't have to re-pay your loans (to the extent that's even possible) certainly won't make it <b>easier</b> to raise capital.

[jaybee]

<p>I'm a CPA who works mostly with small businesses. Generally, if you are operating as any entity other than a proprietorship, creditors will require you to personally guarantee any debt before they will extend credit to you. In other words, if the business fails, you're still on the hook for the debt.</p>

<p>Follow Jerry Litynski's advice. Find a local small business tax profession.</p>

[kevin_b.2]

<p>Is there such a thing as default insurance?</p>

[kelly_flanigan1]

<p>In California if you become a LLC you get to pay the Francise tax board 800 bucks each year. It is due about 3 1/2 months after you become one.</p>

<p>Some places view a LLC as one that one eyes with more examination for a loan; thus you further cut off who will loan to you and at what rate. You get moved into a higher risk pile.</p>

<p>Most all businesses fail; thus lenders sweat loan details.</p>

<p>The market for getting a loan is very poor right now.</p>

<p>You are better off to fund it yourself.</p>

<p>If you shoot 8000 per year; 10 percent in Calif goes for that LLC fee.</p>

<p>If you shoot 800 per year you pay the fee even if you had other expenses.</p>

<p>In open accounts at my shop LLC's tend to pay late; I thus tend not to open accounts anymore to LLC's since many are flakey.</p>

<p>In California professional licensed professions can not usually be a LLC; thus this culls out architects; doctors etc.</p>

[kelly_flanigan1]

<p>Kevin; lenders what something tangeable; your gold bars; cars; house with equity.</p>

<p>Thus if the loan sours like a typical business does; they have hard assets to grab and sell off.</p>

<p>They really want deep hooks; part of your hide.</p>

<p>Thus it is better to self finance .</p>

<p>It can be so bad that to buy a 30k camera back even if one gives a bank a physical 30K in ultra conservative low risk stocks to hold as collateral in a vault; they can fart around to figure if they want to loan you any money.</p>

<p>Look at it his way; most business fail in a dozen or two months due to lack of capital. You are asking anotherr for a loan; the loan officer has less ammo to lend. Banks are failing. His job is to make money with a loan; and he wants to see if have the right stuff to pay the darn thing off.</p>

<p>Loans cost money. If you buy a bunch of crap; or even high tech stuff it rapidly is worth little,</p>

<p>The LLC can mean the loan chaps want your own hide's assets; ie those gold bars; your house; your savings "in the loop" to be grabbed; since most places fail.</p>

[jole_t]

<p>Yes you're home free !<br>

Assuming the LLC is respected as such and the business loan is made to the LLC and you don't guarantee it. The debts of the LLC are the LLCs.<br>

But that is not how it will work in practice. As Joel pointed out, no lender is going to loan into a thinly capitalized entity without getting a guarantee from a person or entity that can stand behind the loan if things go south. That person will start with you the owner.<br>

If you don't like it raise some form of equity and not debt.</p>

[daverhaas]

<p>Kevin - </p>

<p>As far as I know the only type of "default insurance" on a loan is paid via an additional payment to the lender / insurer via a premium on the payment. It's typically called Mortgage Insurance and doesn't come that cheap. </p>

<p>In addition to the collateral - A bank will look for a business and marketing plan (2 separate documents) - the business plan outlines what you will be doing and how, along with your projections of sales and income. They will also ask to see your marketing plan - how much you plan on spending, and how it will be distributed as well as a projected success or hit rate. All of this to make sure that you're not going to take the loan and bail on them. If you have both of these pulled together then great. If not - better get to work on them. </p>

<p>You've gotten some really good advice about talking in person to a cpa or lawyer regarding the set-up and funding. I'd advise following that - make an appointment asap. </p>

<p>Dave</p>

[jole_t]

<p>"All of this to make sure that you're not going to take the loan and bail on them. "<br /><br />That would be more to help decide if the business makes sense and whether they want to loan.<br /><br />To help ensure they get their money back I think you will find they go way further then that.<br /><br />They'll want the intital loan funds to be held at the bank and likely want you to use them as your businesses bank so that all your business receivables come into the bank (the easier to foreclose on them). They will take a security interest in all your existing and future business assets (we already mentioned the personal guarantee). And they'll write a long list of loan covenants about what you can and can not do (including, of course, any money or other assets you may want to take out of the business whether as salary, dividends or otherwise) and what financial ratios you must maintain and what reports you must provide (think yearly tax return of the guarantor for starters). They'll require consent for any major decisions either directly or via the loan covenants. And if they get the slightest whiff of the business going bad they will call the loan and freeze your accounts. So what does that leave you that you can do without them looking over your shoulder ? They'll let you run the day to day operations assuming things go well...<br /><br />Not to beat a dead horse but banks usually don't give out loans after receiving some information and then they let you go on your merry way while they sit back and hope the plan goes well and one day the money is returned.<br>

<br />"As far as I know the only type of "default insurance" on a loan is paid via an additional payment to the lender"<br /><br />We all wish. http://en.wikipedia.org/wiki/Synthetic_CDO<br /><br />More seriously, not for what the OP is thinking.</p>

[markci]

<p>Only giant investment banks get to keep their gains and pass their losses on to the rest of us. Sorry. Maybe one day you'll be "too big to fail," but until then I'm afraid running a business does involve risk.</p>

[mikael_karlsson]

<p>The only way to not get knocked around by debt is to have none. If you can stand his voice (and sometimes rather preachy ways) spend some time listening to the Dave Ramsey show (available on-line) and you'll soon find all sorts of reasons never wanting to buy anything on credit or take out another loan!</p>