Sunday, October 11, 2009

Fudging Loan Application Of LLC

Question: I'm a 1/3 partner in an LLC - we are having credit problems getting a loan because of my credit - not too bad, just not good enough. We need this $65,000 loan for biz improvements - the broker suggested taking me off the LLC paperwork just until the loan is approved then putting me back on. Your thoughts or suggestions would be greatly appreciated. thank you. Barry, CA
Answer: My reaction is that the broker is suggesting you commit banking fraud. Stop and think about what it means to "take me off the LLC paperwork just until the loan is approved". If I understand the suggestion correctly, at all times you will be the true beneficial owner of a 1/3rd interest in the LLC; however, the broker recommends submitting loan applications to banks showing just two LLC members each having a 50% interest. It is a federal crime to lie on a loan application to a federally insured bank. See Lying on mortgage application can lead to a fine and even jail time.

I'm not sure what problem a bank has with your bad credit if the other two members have good credit. Normally, all owners "jointly and severally" guaranty small business loans. That means the bank can recover the full amount of the loan to the LLC from any member. If the issue is that the bank does not wish one with bad credit to have control over the money loaned, then perhaps there is another way to deal with the situation. The LLC could be converted to a manager-managed LLC. Then the two members with good credit are made the managers. You are left a member but not a manager. For good measure, the LLC operating agreement could state that only managers may have signature authority over LLC financial accounts. Not sure if this will calm the loan officer's fears but it never hurts to inquire. Lying is not an option.