What are corporate bylaws and why they are important when obtaining a hard money loan

What are corporate bylaws and why they are important when obtaining a hard money loan

Corporate bylaws, or in the case of an LLC, an operating agreement, are legally binding documents that outline the internal rules, regulations, and procedures for the operation and management of a business entity. These documents are typically created when a corporation or LLC is formed, and they play a crucial role in governing the entity’s internal affairs. When obtaining a hard money loan as an LLC, these bylaws or operating agreements remain important for several reasons: 


1. Ownership and Management

Corporate bylaws or operating agreements specify the ownership structure of the LLC, including the ownership percentages and the roles and responsibilities of members and managers. Lenders need this information to understand who is in charge of the company and who will be responsible for repaying the loan. 

2. Decision-Making Authority: 

These documents often outline the decision-making processes within the LLC, such as how votes are conducted and who has the authority to make certain financial and operational decisions. Lenders want to know how major decisions affecting the business will be made, especially in the context of the loan. 

3. Liability Protection:

For LLCs, operating agreements clarify the limited liability protection afforded to members. Lenders are interested in this because it affects the risk associated with lending money to the LLC. Limited liability protection means that the personal assets of members are typically shielded from business-related debts.

4. Capital Contributions and Financing:

Bylaws or operating agreements may detail the capital contributions made by members and how additional financing will be obtained. Lenders want to understand the financial structure of the LLC, including any existing debts or financial obligations.

5. Compliance and Legal Structure:

These documents ensure that the LLC is operating in compliance with state laws and regulations and maintains its legal structure. Lenders want to ensure that the business is in good standing and operating within the boundaries of the law.

6. Distributions and Profits:

Bylaws or operating agreements often specify how profits and losses are distributed among members. This information can be important to lenders because it impacts the LLC’s ability to generate income for loan repayment.

7. Defaults and Loan Agreements:

If you are obtaining a hard money loan, your lender may want to review your bylaws or operating agreement to ensure that they do not conflict with any terms or covenants of the loan agreement. This can help identify potential issues before the loan is approved. 


In summary, corporate bylaws or operating agreements are essential documents for any LLC, including when seeking a hard money loan. They provide transparency to lenders regarding the LLC’s ownership structure, management procedures, and financial operations, all of which are critical factors in assessing the risk associated with lending to the entity. It’s important to have well-drafted and up-to-date bylaws or operating agreements to instill confidence in potential lenders and ensure that the business operates smoothly during the loan term. 


About Author

Brock VandenBerg has been investing in short term real estate loans for over 20 years. During that time, he established TaliMar Financial, one of the leading real estate private lending companies serving the residential and commercial real estate market. Mr. VandenBerg also invests in the private real estate debt market on behalf of high-net-worth investors, family offices, and institutional partners through individual trust deed investments and a private mortgage real estate investment trust, TaliMar Income Fund I.

Prior to establishing TaliMar Financial, Mr. VandenBerg spent two years working with the Federal Deposit Insurance Corporation (FDIC) managing the closure of failing banks and the sale of their loan portfolios. His experience at the FDIC helped shape the strategy he uses today to minimize risk while maximizing returns for his investors.

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