How to Avoid "Piercing the Corporate Veil?"

Question

I have a Series LLC I use to collect income for my consulting business, but the income goes to my personal checking account. If I created a child series to hold an investment property (not collects rents though, just hold), is the corporate veil already pierced since the Parent LLC collected income for my consulting business? If so, will ceasing the use of this LLC as my source for consulting income remedy any issues as long as investment properties are placed under series after I stop collecting income from the Parent LLC?

My goal is to determine if I can still use this LLC as a holding company while maintaining liability protection. My overall strategy is to minimize the number of entities I create. A simple holding-operating LLC strategy is what I want, where the Holding LLC contains properties organized into series, and the Operating LLC collects rents.

Thanks in advance

Luis Alvarez · Answer

Hi @Adam Burrows, wanted to give my 2 cents from an estate planning/asset protection background. If I'm following this correctly, the 1st issue I see is that you have an "active" business (consulting) versus a "passive" business (the rental property, assuming you don't do hands on management, etc.)...this would be a separating line for many people I've talked to about this.  From an exposure to liability, in the sense of how much a party can be responsible for action/inaction can come down to the participation for that business.

The 2nd issue is that your consulting business income is going into your personal checking account, and not the bank account tied to the LLC which (presumably) owns your consulting business. Whichever LLC you have the consulting business in, is not doing anything much for you because of the comingling of funds into your personal account.  Now mind you, depending on what type of consulting you are in, your exposure to liability from that business activity may be very limited, thus, a sole proprietor may be fine.

3rd issue, where would the rents to your property be deposited to? You mentioned you wouldn't have it go in the LLC which you would form for that rental property.  (Again, you could be comingling, depending on what your plan was for this).

4th issue, in trying to keep the existing parent LLC functional for potentially both, it makes it unclear the purpose of the LLC in the first place (this is something typically indicated clearly in your Operating Agreement, assuming you have one).

LLCs can provide great asset protection (contrary to what many may say or believe), BUT...big BUT here, it must be set up correctly and maintained correctly.  I'll say that again, it must be maintained correctly. This means you have an LLC for a single business activity, which is filed correctly, has an Operating Agreement with clear and precise terms, you set up a separate bank account for that LLC and its related business activity, you do not use that bank account in any way for personal activity, and while it varies per state as being a requirement, you always want to make sure you have periodic filings and to take it even further, hold a "meeting" once a year...even if you're the sole member and there's not much changes that took place for the year.  This is all to show to a Court and a savvy plaintiff attorney (when you get sued) that your business activities follow corporate formalities and they are separate from you as an individual.

I see why many of us on BP want to keep admin work to a minimum and reduce the necessity of extra entities and extra bank accounts, but these are things that the big players do.  And while I'm certainly not there yet in terms of real estate, I know that any hiccups in my acquisitions and scaling up won't come from a lapse in my asset protection structure.

I hope this helps! Feel free to ask away..

Carl Stenberg · Answer

@Adam Burrows, your entity's "corporate veil"  isn't necessarily pierced until determined by a court of law, and the goal is never to give anyone a reason to. As such, it is highly recommended that you keep the entity's bank accounts separate from your personal accounts. Commingling of funds could have legal consequences for your entity's limited liability status.

A few other LLC "maintenance issues" to think about are: (i) state filings, (ii) corporate transparency act filings, (iii) organizational documents (e.g., a Series LLC should make sure it has the appropriate articles for each Series) and (iv) taxes.

The "holding-operating" strategy makes sense for someone starting in real estate investing. It is fairly low-cost and efficient (you can always scale your entities as you grow; there is no need for an ultracomplex structure at the outset), but it is essential to ensure that entities are appropriately maintained.

Carl Stenberg · Answer

@Adam Burrows, if the property is deeded into your name at closing, you can transfer the property to your Series LLC via another deed at a later time (I'd recommend using an attorney to make sure that this process is done accurately). However, if you're lender has no issues with you taking the title in your Series LLC at the outset, I would make sure that your loan officer, realtor, title company, etc., knows this is your intention and work with them to have the property transferred to the applicable Series in your Series LLC.

*Please note that this post is for general advice only and does not constitute or in any way form an attorney-client relationship between the reader and the maker of this post.

Adam Burrows · Answer

@Carl Stenberg Thanks for the reply!

Regarding the Holding side of it - what is your experience when it comes to deeding a property to a holding company after close? I like the operating-holding strategy, but the only side of that which is simple is the operating component. My loan officer (I know...) said that people will let title know ahead of time and then complete the deed transfer immediately after closing. I just don't trust that, especially coming from a loan officer.

Appreciate any insight you can provide based on your experience or experience of your clients.

Adam Burrows · Answer

@Luis Alvarez Thanks for the comprehensive explanation! My apologies on taking so long to respond - I decided to abandon the consulting LLC in its entirety as it was completely unnecessary. It's simpler to act as a sole prop for that income stream.

The "comingling" event is a difficult to define concept for me. One transfer of money from a personal account to an account associated with the property and you're toast!? What about owner draws? What if I experienced a net loss for the month and need to supplement the property account with personal money to cover an expense or payment?

I'm currently under contract for my first MF 4 unit property. Before I complete this transaction I want to ensure I set up any required entities correctly. The primary struggle I have is whether I even need an LLC or not. BP has starkly contrasting advice when it comes to entity structuring - and for good reason because there are so many variables to consider.

I'm interested in your advice on entity (or no entity!) architecture for someone who plans to invest aggressively in real estate, specifically 2-4 unit MF properties, and possibly commercial 5+ deals in the future.

Should I just manage a healthy umbrella policy and forgo the entities entirely? Should I use an operating-holding LLC structure where both are owned by a Trust without ownership in each other? I've drawn out a dozen different scenarios and the decision is paralyzing. Since I'm not buying properties in cash (nor willing to accept a commercial rate for a conventional deal) I am doubtful of deeding property to a Holding LLC after close - it seems risky (and wouldn't that pierce the corporate veil already?).

I have a lot to consider, but I just want to ensure I set it up the right way from the beginning. My primary goal is asset protection, followed by simplicity, and a bonus goal of as much anonymity as possible.

Thank you!

How to Avoid "Piercing the Corporate Veil?"

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