Best Practices for Maintaining the Corporate Veil of an LLC

14 Replies

I own several rental properties in an LLC. The LLC has its own bank account/credit card which are only used for those properties, any bills/contracts are always signed with "Manager XX LLC" next to my name, etc. Are there any best practices, in addition to those few, that you employ to ensure that the corporate veil of your LLC is not pierced?

The obvious. Keep your finances separate. Separate tax returns, etc. Don't use company assets for personal use and vice versa. Follow your Operating Agreement. Exceptions happen, that's why you have resolutions. If you contribute capital (or material, etc.) account for those capital contributions. Keep your corporate filings (with your state's Secretary of State) and meeting minutes up to date. Document your decisions/meetings (if multi-manager) and memorialize in a formal motion/resolution book. Sign, seal, date resolutions and motions. Give notice for annual events (meetings). Electronic records are fine, but have a backup plan.

Keep your company well capitalized. My view is that even for single member LLCs, the company should own and grow (over time) the assets. Company owned, manager controlled. This is true with multi-manager LLCs as well.

Nobody really cares about your corporate formality discipline until there is some kind of issue. Then you will see that your discipline can pay large dividends.

Both of you guys hit all of the points that I know about. I am assuming that your llc has insurance policies for the properties in its name also. From everything I have seen, where most LLC's mess up is failing to do their annual minutes, filings, etc. Even though they are far less involved and time consuming than an S-Corp, people still neglect them.

Thanks a lot @Chris Martin and @Brandon Ingegneri .

Two more questions:

1. Can I use one credit card for all of my LLCs, as long as each LLC bank account reimburses its part of the credit card bill?

2. Are meeting minutes necessary for a single member LLC? If so, what should they look like?

@Rick C.

Do you own your rentals free and clear, or do you have mortgages on them? If you have mortgages, are they in your name or the LLC's name? I am a new investor trying to learn about LLCs.

@Russ Brantley - Two of my original rentals are in my personal name, but I am looking to change that though via a sale of one and a refinance/transfer of the other into an LLC. Both have 30 year fixed residential mortgages on them.

The rest of my properties are in LLCs. They are all owned free and clear, but I am actively looking to cash out refi them. Commercial loans will be required for those.

@Rick C.

Thanks for your response! I have heard before that if you get a loan on a rental in an LLC's name that it has to be a commercial loan. Thanks for confirming what I thought I had learned.

I have one rental property. I have a mortgage in my name. I've been thinking about creating an LLC and transferring title to the LLC. I've heard that the mortgage holder could call the loan due or foreclose for violating the terms of the contract. Maybe it's best I just leave it as is for now

Piercing the corporate veil typically happens or is attempted when there is a legal reason to try and do so. That being said, the most typical case I have heard of when this is attempted is because someone wants to sue and the LLC doesn't have the assets to cover the claim so they attempt to go after the partners. Having an umbrella policy in place to cover the LLC is a very cheap insurance policy to help avoid this attempt. All of the suggestions previously described are great and should be followed as well.

No problem, @Russ Brantley . If you decide to move your property into an LLC, you should check what fees would be associated with such an action occurring in your area. For example, locally for me, the city of Philadelphia requires that the transfer tax is paid on the accessed value of the property transferred. The transfer tax is 2% out / 2% in, which totals 4%. That can get expensive very quickly.

You are correct that the mortgage holder could legally call the loan due if you transfer to an LLC. Although, it is rare that they will actually do that, especially if you are consistently making on time payments.

Originally posted by :

Two more questions:

1. Can I use one credit card for all of my LLCs, as long as each LLC bank account reimburses its part of the credit card bill?

2. Are meeting minutes necessary for a single member LLC? If so, what should they look like?

 1. If you are going to go this route, then I would suggest you have a parent company that handles the finances and subordinate companies for asset protection (e.g. one company for rentals, one company for flips, etc). You can have the parent company handle the overall finances for both companies and the money can flow that way. Obviously, you want to keep in outside of your own personal finances and in some kind of business structure. 

2. Check with your state requirements. Not all states require LLC's to have annual meetings and keep minutes to stay active. Your secretary of state's office is where you should start (or your attorney) to determine what is required and when. I personally keep a matrix of what is due, when it's due, and where it goes on the wall of my office. I then setup reminders on my e-calendar to remind me a week in advance that something is to be turned in so I'm not falling behind.

Thanks @Matt Motil . Would the umbrella policy be in my personal name or would I need one for each LLC?

Originally posted by @Rick C. :

No problem, @Russ Brantley . If you decide to move your property into an LLC, you should check what fees would be associated with such an action occurring in your area. For example, locally for me, the city of Philadelphia requires that the transfer tax is paid on the accessed value of the property transferred. The transfer tax is 2% out / 2% in, which totals 4%. That can get expensive very quickly.

You are correct that the mortgage holder could legally call the loan due if you transfer to an LLC. Although, it is rare that they will actually do that, especially if you are consistently making on time payments.

To clarify, pretty sure transfer tax is 4% (in Philadelphia only) and it's customarily split between buyers and sellers, that's where you're coming up with 2% in and 2% out. It's negotiable between both parties as to who pays though. 

If you own the property and are transferring it to an LLC, you're on the hook for the entire 4%. Same end result but wanted to clear that up for anyone reading.

Originally posted by @Rick C. :

Thanks @Matt Motil. Would the umbrella policy be in my personal name or would I need one for each LLC?

You could have one for the main LLC structure and then one for the personal assets. I have a personal umbrella of $1M for $300/year. Very inexpensive at the end of the day. My parent LLC has a larger policy for around the same ratio. The idea here is that if your had a landlord policy in place on an individual rental and it covered you for $100k, and you ended up with a $300k claim an attorney might try to go after you personally if you didn't have additional assets in the LLC. With the umbrella policy in place, it would kick in where the lower policy maxed out. Make sense?

@Rick C. @Troy S.

Transferring a property into an LLC sounds more expensive and complicated than I had previously heard about. I thought I would just do a quit claim deed to change the title into the LLC's name and that was it. I've also heard that this won't really provide asset protection anyway since the mortgage is still in my name. For now, I will just leave it as is. I don't really have any personal assets to protect right now anyway. Thank you for the advice!

Originally posted by @Rick C. :

Thanks a lot @Chris Martin and @Brandon Ingegneri .

Two more questions:

1. Can I use one credit card for all of my LLCs, as long as each LLC bank account reimburses its part of the credit card bill?

 Rick - this is one of the easiest way the veil gets pierced, from what I understand.  You are mingling the credit of several entities together and it's a great way for a savvy lawyer to say that NONE of the entities are separate from each other and, if it's a personal credit card, that it's all just you.

If you are not going to get a separate credit card for each entity, then here's how you handle this.  Go ahead and charge all on one card.  Then you, as a member, submit an expense report to each entity for its portion of the charges.  The entity pays you for your expenses that you've incurred and you then pay the credit card.