Business account or Personal account

18 Replies

I’ve always had this concern do u need a business account bank account  or you can use your personal account bank to do real estate investing. Do u need a create a different account if u put a property under an entity?

I am no CPA, so I would get a hold of one of them. But I will say that with my rentals I just have a separate checking account that way my personal and rental funds are separate.

@Michael Thomas

Depends if you are using a legal entity such as a LLC. If so, then it really needs its own bank account. The legal entity needs to operate entirely separate from yourself --- that's part of being its own legal entity. So, in this society it would need its own bank account. For example, you have your own bank account, right? Its not like you operate your life out of another person's bank account (unless you are one of those "unbanked" individuals). same idea..

But, if you don't use a LLC, which there are many reasons not to, I wouldn't bother with a separate business account. However, it would be advisable to have a second checking account, it could still be personal, to operate your investing out of just for accounting reasons.

Not sure what sort of investing you are thinking of doing, but a "classic example" would be rentals.  if you are landlording in NJ, the security deposit must be in an interest bearing account.  So, a simple checking account that earns interest, even nowadays at 0.01%, is legal (of course, consult with a qualified professional).  If you own the property personally, you don't need a separate account and could use your own.  But, for accounting purposes you might want a separate checking account.  Also, you don't want to run your bank account so low that you just spent your tenant's security deposit.  That would be bad...

Hope that helps.  Good luck.

@Michael Thomas

Well, if you have LLC it will need to have a business checking/bank account.

If you are holding Title to your rental properties in your personal name like many investors do, there is no general requirement to have a separate bank account.  You can operate out of your own, single personal bank account.  

For NJ, you need to hold the security deposit in an interest bearing account.  Many banks have checking accounts that give interest, so it doesn't have to be a savings accounts.

Make sense?

@David M. Ok thank

One last question if u do have ur properties under an LLC with a separate bank account/business account when the rental money goes in the business account and u set aside vacancy, cap ex, repairs etc what's ever left over which is the cash flow do u transfer to your personal account

@Michael Thomas

You can transfer "whatever" you want. hmm.. If you are thinking about taxes/profit, your tax is determined from your tax return (income minus deductions, basically). It has little to do with what is in your bank account. Its part of why its called a pass-through entity. When you move funds FROM the llc bank account to your personal account, its called an 'owner's draw.' When you put money in, its called a 'contribution.' You need to mark it as such on your accounts/ledger. That is, when you take money in and out of your LLC's bank account it not a matter of "taking profit" as some people think. Make sure you move funds along lines of ownership.

From my point of view, the "cash flow" is whatever you want to take out of your LLC's bank account, more or less since it is a pass-through entity.

Does that mostly make sense?

@David M. 

Basically just make sure you mark what you do when putting money into an llc and out of an llc. Put you can take out money when ever you want. Also how much does an LLC cost and out need to go to bank to tell them to make a bank account with the EIN number

@Michael Thomas

Basically.. You need to speak with a professional about this probably.  Do you do your own tax returns?  Do you do your own bookkeeping?  They tend to go hand in hand.  But, if you do your own bookkeeping and can properly sum up all your numbers, then its just a matter of handing over the summary to your accountant or whomever prepares your taxes.  This is how many people get into using Quicken.  If they do their bookkeeping in that software line, then their accountant can see their accountants and prepare their taxes.  Not the only way to do it..

As far as costs, it sort of depends.  In NJ, its about $125 or something to register online and another $100 something annually.  You need to figure out some of the NAIC codes and whatever, but you could be done in 5-10 minutes...  Same with getting the EIN next with the IRS; that is all done online.  With your Cert of Formation that you print out, you can go to the bank and get a business checking account.  Depending on your bank, you can get the most basic checking account for no fee if you leave a $500 or $1000 in it.  Pay for some checks and off you go...  This is the MOST SIMPLEST, basic way to start, not necessairly the the most thorough or complete.

But again, you need to make sure you operate the LLC as a separate entity from yourself and don't use it as your alter-ego. Those are two sure ways to pierce your corporate veil to my understanding. Remember that legal entities such as a LLC are not eligible for conforming residential loans. So, if you plan on taking Title to a property with the LLC, you need to use commercial financing (there are plenty of other discussion threads on that, many of which I've posted).

@Michael Thomas I think you overthinking about it. Do you have the funds to purchase a property? Do you have a property in mind? Where are you in the process of obtaining a property?

All of the LLC, bank account talk is not that important right now.

If you have a business entity, open up a business account.
If you are doing activities in your personal name, open up a personal account.

We bought houses in our own names for quite a long time.  Expenses came out of our own accounts, and we held the tenants' money incorrectly.  Yikes.  You know to put it in an interest bearing account, which is right. 

We ended up setting up an LLC after some time and a lot of houses, and then opened a business bank account that corresponds with the LLC, using the LLC's EIN number. At first, our LLC didn't have any credit score of its own and we had to set up deposits (called owner contributions, like said above) and could take draws. We also learned we could apply for business credit, which would keep some of the expenses over on the business side of things, rather than keeping all of the expenses on our personal account.

Some business credit companies want the owners to personally guarantee the debts, but some places do not.  MyFico has a community forum where people discuss credit, and specifically business credit.  I learned bunches about business credit there.  I also have watched Noelle Randall on YT, and she explains the HOW in a really great manner.

As stated above, many people do not use an LLC, and getting financing for houses held in an LLC is a different beast. Not the same hoops as Freddie Mac and Fannie Mae, or conventional lending. It is a commercial or portfolio product, where the LLC is on the line for the mortgage, and DSCR rather than DTI is considered. Interest rates are higher. Down payments are larger. It is a different ballpark...but not an unreasonable place to play ball.

I have one account for the properties held by the one LLC. I have another bank account for the properties held in the other LLC. And we still have one house that still needs to go into an LLC. So two business checking accounts. And several business credit cards in the name of one of the LLCs. I am just working on getting the business credit started, so have 3 business credit cards at this time.

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