Frequently used by small businesses and partnerships, a limited liability company or LLC manages assets or runs a business but protects the owners from personal liability for business activity. An LLC can have a single owner or many partners, called members. LLCs are set up under state laws and can vary from state to state. All income or profits from an LLC pass directly to the members, so the LLC is exempt from federal income tax, but individual beneficiaries pay personal taxes on their income. How an LLC affects personal credit of its owners depends on how the LLC is set up and operates.
LLC Business Loans
An LLC that borrows money or gets credit as a company normally will not affect the credit rating of its members. An LLC business loan applies strictly to that business if it was taken out in the name of the LLC and had no other borrowers or guarantors. Even if an LLC goes bankrupt, the personal credit of its owners may not be affected.
Personal LLC Guarantees
Most LLC loans, however, especially for new or small businesses, have to have a personal guarantee. That means one or more of the LLC owners must sign onto the loan and guarantee its payment. In that case, the individual will share in the loan responsibility and credit-reporting agencies may count some or all of that debt against the individuals co-signers.
Separate Credit Ratings
An individual with poor personal credit can form an LLC and get a good credit report if the company pays its bills promptly and maintains a good credit operation. Conversely, a poor LLC credit report will not reflect on the individual owners if they have not signed on any LLC loans or debts. Personal and LLC credit ratings are separate unless debt is shared.
If an LLC has several partners or members, but only one guarantees a loan or secures a debt, only that one will have his credit report affected. LLC owners or partners who do not participate in that loan won't be affected. The LLC will have its own business-credit report, which will reflect all loan or credit activity by the company but not the individual members.
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