LLC reserves, comingling of funds

[Robin Hines]

Ok, I'm a business novice and need input from those with experience in this area. Let's say that I have decided to put my rental properties into an LLC (or several llcs). Am I required to have all necessary cash reserves when I create the LLC? That is, what if I have, for the sake of argument, $10k in reserves for one of my newly created LLCs. After creating the LLC, let's say that some sort of emergency occurs with repair bill for $15k? Do I make a loan to the LLC from my personal funds? How does this work in practice?

One of the main sticking points for me with creating an LLC is the whole comingling of funds thing and what to do if you do not have adequate reserves if anything should come up. I know this is a basic question, but I haven't come across a post where this has been addressed. Any input you can provide is much appreciated.

[Brian Schmelzlen]

Hi Robin.

Definitely do not commingle funds, and by that I mean do not have all your personal and LLC funds going into and out of the same bank account. There is a legal concept called "piercing the corporate veil" (applies to LLCs also), and commingling funds is one of the surest ways to lose your liability protection.

You should have cash reserves when you create the LLC (again because the "piercing the corporate veil" concept), but that does not mean enough money to cover all unforeseeables. I tend to think 2 months of expected operating expenses is enough. You can always put in more money.

If you have $10k in reserves and due to unexpected repairs you need to put in $5k more, you can do so in 1 of 2 ways. You can either make a loan to the LLC as you suggested, in which case there should be a note, regular payments, and interest at least at AFR. Your other option is to make a capital contribution to the LLC. You would simply have the LLC book it as a contribution, eventually record it that way on your tax return, and you can always take the money back out as a distribution later.