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I am 1.3rd partner in an LLC. The LLC was set up to protect the siblings from any personal liablity from the rentors.

Asked over 2 years ago - California

LLC is set up to protect us each from liability on a rental home. The LLC is one year old - in california.
One partner wants to take out a loan against the LLC (re-mortgage house) to fund a business venture: Buying real estate and flipping it.
If this individual defaults on the loan, is the house (value: 2 mil) in jeopardy? Will the other 2 partners be 'out' their 1/3rd share of the house? Neither of the 2 partners can afford to 'buy out' their share of the home. The home was inherited and its value is due to the increase in real estate - over 20 years ownership.
what are our risks? should we allow the 1/3 partner (sibling) to proceed or are we at risk of loosing our 1/3rd share or home altogether (LLC) if the borrower cant pay monthly payments on the loan ($300,000 is request.

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Attorney answers (3)

Dana Howard Shultz

Reputation Level 15

Answered over 2 years ago. Limited Liability Company (LLC) Lawyer in Oakland, CA.

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I agree with the first two answers, though I would like to add the following:

1. It is not clear whether the proposed business venture (flipping real estate) is something that your sibling wants to do on behalf of the LLC or on behalf of him/herself as an individual; if the latter, then it makes no sense whatsoever for the other two siblings to go along with the plan to put LLC assets at risk.

2. It is important to know what the Operating Agreement says about approval of this type of transaction. An Operating Agreement might say that at least a majority of the voting interests of the members must approve, and it might say that unanimous member approval is required, or it might say that the manager(s) can make the decision. You should examine the Operating Agreement (or ask an attorney to do so for you) so you will be absolutely clear and correct on this issue.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

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Henry Daniel Lively

Reputation Level 20

Answered over 2 years ago. Tax Lawyer in Costa Mesa, CA.

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If the house is being used as security for the loan, and it sounds like it is, then the house is collateral for the loan and can be foreclosed on if the payments are not made. Use this information to decide whether you want to let him go forward with the loan. The lender will probably want all of you to sign on the loan.

Disclaimer - This response does not constitute legal, accounting or other professional advice. Only through a personal, confidential consultation with qualified legal counsel can anyone properly evaluate their own unique legal challenges and determine what, if any, appropriate legal strategies and tactics should be implemented to meet those challenges.

Circular 230 Disclaimer - “Nothing in this response is intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties regarding any transactions or matters addressed herein. You should always seek advice from independent tax advisers regarding the same.

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Steven Alan Fink

Reputation Level 20

Answered over 2 years ago. Real Estate Attorney in Newport Beach, CA.

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The house is at risk if there is a default by the LLC on the loan. Usually the lender will require all 3 of you to guarantee the loan. Is this business venture just his or will all 3 of you share in the risk or the reward? If all 3 share, you can decide if you want to risk the house. If it is just his venture, you should not do it.

The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change.

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