Financial Organization - LLC or not?

[Rob Cucugliello]

Hi all!

Hoping for a little guidance here. I am small time but growing. I currently own 2 SFH rentals but will soon have 5 rental units within 4 properties, plus a 5th property that I'll be flipping (to build additional capital). I do not have an LLC, but I do have umbrella insurance (which will need to be updated).

With the upcoming growth, I quickly noticed I need to be more organized, specifically financially. Everything is going in and out of my personal banking accounts with a 'separate' savings account to hold rent, ect in - but this necessitates a lot of account to account transfers. I also have to track any expenses separately, and make sure it eventually hits the 'Real Estate' labeled account appropriately. This also made tax season a lot harder than it had to be. My gut reactions is to create an LLC, and then a small business bank account associated to that LLC, but I'm not the LLC is actually required. So my questions are:

  - Should I just create a small business bank account? or just a separate personal bank account? or does it not matter? other options?

- Does creating an LLC help with any of this? or just satisfy the need of an EIN which is needed to create an business bank account?

- Will an LLC help with organizing taxes? or will just a separate bank account take care of that.

  - I am considering adopting Buildium to manage the rentals (applications/background checks/leases mgmt), which again I believe requires business bank accounts. Is this true?

Overall I'm trying to understand if my gut reaction of creating an LLC is right, or if its really just the need to separate my finances - and if the latter, is an LLC just a prerequisite? Any additional guidance on the overall financial organization is much appreciated!

Hope that all made sense!

[Alan Rohrer]

@Rob Cucugliello

You are definitely on the right track- and the fact that you're thinking of getting organized BEFORE you grow is good move.

A few answers, and then a few recommendations:

1) If you own rentals, it's pretty important to have an LLC as protection. I've seen/heard of too many cases where someone gets injured in a rental and then goes after the owner's personal assets.

2) Part of making the LLC legitimate is to make sure both on paper and in practice- that it is separate from you. Running everything through a personal bank account is one of the easier ways for a lawyer to argue that the LLC isn't really operating as a separate entity... then they can come after you.

A small business bank account would be a good way to go- after you create the LLC.

Other than the need of a separate account to make the LLC legitimate, it also will help you stay organized.

3) It's important not to hold rental properties in an S-Corp because it can cause problems in the future if trying to transfer properties... plus- because rental income isn't subjected to SS taxes, there wouldn't be a benefit. However, if you are also going to flip houses, then you should look into running that income through an S-Corp via another entity.

Recommendation: Being your size right now and in order to prepare yourself for growth, I'd try to have the following things in place:

- An LLC with a separate bank account

- A system where you document all receipts for your expenses, including mileage

- A simple spreadsheet or basic accounting system that helps you allocate expenses and income by property

- A process where you reconcile your bank statement at least quarterly to make sure you aren't missing any expenses

There may be something I'm missing because I don't know your whole situation, so please talk to your accountant or attorney before you act on any of the things I said above!