Citrus Heights, CA asked in Business Formation, Business Law, Contracts and Tax Law for California

Q: What happens to a personally guaranteed EIDL loan from a partnership if that business converts to a multi-member LLC?

My friend has a business with his girlfriend (it's registered as a partnership) and they also have a personally guaranteed EIDL loan. Him and I and my wife (not his girlfriend) are going to create a multi member LLC using the same name (with the LLC on the end). I just wanted to know if my friend and his girlfriend need to tell the SBA that he's converting the business to an LLC and also what happens to the loan? Does my friend and his girlfriend just have to keep paying it off on their own? My wife and I don't want anything to do with the loan so do we need to do anything on our part? Can we state this in the operating agreement before signing?

1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA
  • Licensed in California

A: It's typically advisable for your friend and his girlfriend to inform the Small Business Administration (SBA) about their business structure change from a partnership to a multi-member LLC. They can contact the SBA to get specific guidance on how to handle their personally guaranteed Economic Injury Disaster Loan (EIDL) in this situation. It's important to clarify their loan obligations, as typically the individuals who personally guaranteed the EIDL loan would remain responsible for its repayment even if the business structure changes. If you and your wife are becoming members of the newly formed LLC, it's recommended to state in the operating agreement that you are not responsible for the EIDL loan. However, it's crucial to consult with a business attorney who specializes in small business matters. They can provide personalized advice, review the operating agreement, and ensure all legal obligations and responsibilities are properly addressed.

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