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Forums » Tax, Legal Issues, Contracts, Self-Directed IRA » Debate: does every LLC need a separate checking

Debate: does every LLC need a separate checking

14 posts by 9 users

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Real Estate Investor · Cincinnati, Ohio


I wanted to bring this debate to the forum that I am having with a friend who is also an investor.

The debate, if an owner has several llcs ( all single member) for holding rentals, and one additional LLC acting as manager. All llcs done on the owners tax return being single member. Does each LLC need its own separate checking account and thus each properties' tenants pay the LLC that owns their house? Or is it ok for the manager LLC (for purpose of one name for marketing, maintenance calls etc) to collect all rents, pay bills and just have that one checking acct skipping the back and forth payments from LLC to LLC?
I have been doing the first scenario as I started with one LLC and have added more as I've bought more properties, for liability protection. As I've added I've opened a new checking acct an kept each separate. My friend disagrees and says I'm dong too much work and an have one checking acct for the management LLC only....which is right? Debate please



Wholesaler · Baltimore, Maryland


An LLC can be pierced and you held liable personally if it is deemed not a real business. Whether this will happen is a case by case basis. Real businesses have, their own location, their own phone number, their own banking accounts, equity and insurance, books etc.

Will missing one of those this mean your LLC will be pierced, not necessarily? However the fewer corporate formalities you follow the higher your risk.

Another factor is, how liberal are the courts in your state? I suspect I am at much higher liability risk in Maryland than are Landlords in Texas.

Ned Carey


Small_crab1_copyNed Carey, Crab Properties LLC
Website: http://baltimorerealestateinvestingblog.com/
http://baltimorerealestateinvestingblog.com/


· Greenbrae, California


I just spoke to lawyer about this.......it is his opinion that you must have a different bank account for each LLC. So I agree with you! I am equally as cautious and have been doing the same system as you.



Accountant · Lake Villa, Illinois


I keep every property in a separate entity for both accounting and for liability purposes.

-Steven


Small_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Rehabber · Santa Clarita, California


Every LLC is its own entity and therefore, needs its own bank account. With that said, your explanation above states that one LLC is the management company to collect rents for each of the owner entities. Tat is fine and common, and the management entity can and should bill all tenants under that name and deposit into that bank account, but then needs to distribute the rental income to each owner LLC in which each have their own bank accounts, records, and accounting.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Note Investor · Fort Lauderdale, Florida


The issue you have which was touched on but I will highlight more is you are a single member LLC. As far as the IRS is concerned you are a disregarded entity and are treated like a sole proprietorship. As noted above, some states do not allow the formation of a single member LLC at all. A simple remedy is to add your spouse or relative into the LLC which then forces it to qualify as a partnership.

As far as liability protection, the LLC affords you the same protection as other incorporated entities including asset protection of personal assets and charging orders on the assets of the company.

If/when the concept is ever challenged due to some legal complaint or civil compliant then the examination of each LLC will take place. If each LLC functions as a stand alone operation which not only includes bank accounts, but also meeting minutes and proper resolution documentation like operating agreements and alike then they will be viewed and treated as separate entities and the only charging orders could apply.

If you fail to keep those books and records then the court may knock you back down to a sole proprietorship and reject granting you the limitation of liability of your personal assets and those of the companies.

The use of single-member LLC to hold title to individual real estate assets (as opposed to multiple properties being titled in the name of one entity or individual) is used to limit liability risk, creating “bankruptcy-remote” special purpose entity standards, and also to facilitate tax-deferred, like-kind exchanges under Section 1031 of the Internal Revenue Code.

How you structure the ownership of the asset LLC and management LLC is sort of up to you. The asset LLC could be owned by the manager LLC as a subsidiary, which functions as a compartmentalization of the liability of the asset. It is possible to setup a partial interest from the manager LLC and the rest to you as the natural person, who we will refer to as the investor. The investor can be a natural person or multiple natural people or other LLC. Putting the manager LLC gives authority to the manager over the assets or you will have to document out the relationship just like you would with stand alone manager. For each asset LLC.

And there in lies a little bit of a trap. If your asset LLC rolls up into your manager LLC and pays you as the investor you will have a little less administration over all of the business activity. Since the manager, who manages, has an interest in every LLC the manager could make capital expenditures as an owner of each LLC. If the manager is not, then you have to debit and credit the manager just like a third party. That little concept can pierce the veil if not followed.

If the manager makes a capital advance and you do not properly credit and debit each LLC, then you have co-mingled funds. You are now one entity. Ok, well it's not that black and white but you get the idea. If life get's in the way and you don't treat each and every unrelated entity as an unrelated entity, you can loose the unrelated concept and they might be able to pierce the shell.

As Will pointed out, using the manager LLC to collect and be the public brand is fine. He also added, you must remit to the actual asset LLC. The asset LLC must then remit to you the owner.

So, to summarize my winded ten cents. When you form single member LLC, that is a bit of loophole. What you are saying to the world is that LLC is separate from me and my personal assets. So then, once you make that statement, you must live up to it. The entity must be different than you and any other entity you own. It must act like it does not know you and treat you as any third party business would in the market place. No co-mingle funds, separate bank accounts, separate operating agreements, etc, etc.

In my suggestion, with the manager as an interest in the LLC. You remove a little bit of administrative red tape. The manager is an owner in the asset LLC, can go in its bank account, can get paid and can advance capital as an owner. Fundamentally the manager could be treated as an asset manager and capital manager. Where it manages your money, the investor money, in the assets held in each asset LLC.



Real Estate Investor · Cincinnati, Ohio


Originally posted by Dion DePaoli:
In my suggestion, with the manager as an interest in the LLC. You remove a little bit of administrative red tape. The manager is an owner in the asset LLC, can go in its bank account, can get paid and can advance capital as an owner. Fundamentally the manager could be treated as an asset manager and capital manager. Where it manages your money, the investor money, in the assets held in each asset LLC.

Thank you all for the responses. This pretty much reassured what I was doing was the right way, but I am thinking I still need to fine tune it.

Dion, I did want to ask in regard to the great information you provided if you could clarify for me your last paragraph. Are you saying that in a situation like mine I could make the management LLC an owner of the holding company LLC's (I assume formally via operating agreement and or state LLC amendment) and then the management company could hold just one checking account on behalf of the other llc's? Or would it still be required to have a seperate checking account for each llc and the management company can pay bills for the other LLCs and just disburse to them their net income once a year as @Will Barnard stated?
Thank you again, my friend has already conceded his assumptions were wrong, so now I just want to find the best, yet simplest way to do things.



Rehabber · Santa Clarita, California


I will let Dion answer your question directed at him.

I do need to clarify something on this:

Or would it still be required to have a seperate checking account for each llc and the management company can pay bills for the other LLCs and just disburse to them their net income once a year as @Will Barnard stated?
I never said it would be paid once per year. Typically, rent checks come every month and as collected by the management LLC, it would then need to send proceeds to each holding LLC EACH MONTH, not once a year.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


SFR Investor · Texas


I know this is askew of topic, but if you have several (say 10) properties under seperate LLC's and you want to borrow some or all of the money from each LLC's bank account to something (like maybe another property) how is that accounted for from a legal and taxation standpoint?



Real Estate Investor · Northeast TN, Tennessee


Originally posted by Brian Hoyt:
I know this is askew of topic, but if you have several (say 10) properties under seperate LLC's and you want to borrow some or all of the money from each LLC's bank account to something (like maybe another property) how is that accounted for from a legal and taxation standpoint?

Brian Hoyt, there's no one simple answer to that question. It would be treated in one of several ways depending on the tax status(es) of the LLCs and who or what entity is "borrowing" the money. For example, if the LLCs are treated as corporations it could be a loan between entities. If the LLCs are disregarded it could be a treated as a withdrawal by the owner/partner.



Accountant · Lake Villa, Illinois


@Bill Walston,

You put it perfectly.


Small_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Real Estate Investor · Springfield, Missouri


As to the most efficient setup;

First, define what you want to do. No offense people but, I can't believe how haphazardly people set up business structures with superficial thought given to an overall plan.

You'll find in RE that no one just does one thing but you'll need to accomplish several strategies. A landlord buys and will at some point sell, they will finance, manage, repair, renovate, they may employ others to find properties, the may end up doing lease options, seller financing, you might sell the note, you might find a heck of a deal and decide not to hold it but flip it....you get the idea.

A capital company can do all of these things as the top of a pyramid or on a lateral structure.

Besides comingling funds another way to blow up your corporate veil is to operate outside the purpose of the initial stated business. While every attorney drafting any filing will utilize the catch all phrase...to do all things necessary and related...(or similar) you can easily get into other business operations that can change the flavor and business code of what you did. For example, if you have 5 rentals your net income won't be that much, you buy another property and six months later sell it, you could make more from the sale than you do from rents....I know, not a great example, but it was quicker....

IMO, it's better to actually itemize what you will be doing by category, buy, sell, trade, lease, rent, manage, finance, repair, renovate, demolish, construct, finance and let contracts to accomplish the same, admit partners and investors, affiliates and contractors, brokers and agents of all kinds as necessary to carry on the business of real estate related activities and to do all things thereafter necessary and lawful to conduct same. (Just off the top of my head people as an example)

Now, look at each of those functions and what might be involved with such aspects and address them in your Operating Agreement or By-Laws. Take "investors" for example, how do you admit them? When does that relationship end? What rights do investors have, do the vote? How will distributions of capital be made between investors and other members or stockholders, officers and directors?

Take care not to be so specific in areas that you become restricted in operations, but address areas in general to show the intent to accomplish other aspects rather than looking like you just operate on a lark, spur of the moment and on tangents. Keep the doors open, but at least hang the doors to a frame work.

I'm not going to compete with Dion for the longest post....LOL, but I'm totally against one property one LLC, that is expensive and totally unnecessary in any state. More to keep up with and it increases the chance of the corporate viel being trashed, you're not just maintaining one or two companies but maybe a dozen...it's a myth to think you are safer. If the viel is perieced in one asset poor LLC liability goes to you personally, from ther it goes to everything you own, including all the interests you have in all of your LLCs! This multiple LLC stuff is for attorneys to clean up messes later. Want protection, do two things, pay attention and get insurance!

I'd guess that in the early 90s, most single family rentals were individually owned, no business entity at all, people managed in complaince with laws, maintained properties so no one fell through the floor, kept hazards away and carried insurance. Your ability to act prudently in your dealings is your first line of defense, insurance is second, if those are sufficient you'll never get in a personal bind.


Financexaminer@real estate investor dot com


Note Investor · Fort Lauderdale, Florida


I am so glad my buddy Bill Gulley said this: "....I'm totally against one property one LLC, that is expensive and totally unnecessary in any state."

I could not agree more! I didn't want to rain on anyone's structure but it is a bit silly to have one property per one LLC. It seems to steam from a bit of a misunderstanding of what you get from putting a property into an LLC.

The LLC is the protection and as Bill states, insurance is the first line of defense. So the LLC prevents, provided no pierce of veil, liens and seizure of personal assets deriving from the assets inside the LLC.

So then, do you need to protect claims derived from Subject Property A from attaching or attacking Subject Property B? Well if you even slightly prudent and put hazard insurance on your property, then fundamentally most issues are going to be covered. Are there a slew of "what if", sure but you can just as easily talk to your insurance agent and increase those portions of your policy that you have concerns are not enough. The nominal impact to your premium cost is much less than the administrative cost of a whole other LLC.

@Justin Greiwe, you would join the manager into the asset LLC via the Operating Agreement or Articles of Incorporation depending on the state.

The manager would have an Operating Bank account. The asset LLC would have an Operating Bank account for income and expenses. The Asset LLC still needs a bank account to operate with, it should not use the Manager's account or vice versa.

The function of joining the manager into the asset LLC, is the manager becomes an owner and can enjoy the legal rights of being an owner opposed to a third party contracted vendor who does not own. It to an extent, removes an administrative layer that if not setup that way should be adhered to. The easiest example is capitalizing the asset from the Manager's Bank Account, which would be not be possible the it was a true third party or if they are both the same natural person it avoids co-mingled funds to some extent since manager owns the asset, he can capitalize it.

When you do distributions is up to you. Typical capital market distributions occur every period. I don't know too many folks who want to wait 1 year to realize their return.



Rehabber · Santa Clarita, California


I too agree with Bill and Dion. One entity per property is ridiculous. In fact, quantity of property has zero to do with it, equity exposure is the important factor. Unless each of your properties is a 100 unit apartment complex, there is no need for that many entities.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com




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