How to put money into LLC without "co-mingling"

Question

Hello All,

I have a newly formed LLC that I'm going to use to manage my one current rental property and all future rentals that I hope to begin acquiring in 2017.  I just formed the LLC and opened up banking accounts to run the business from.  I do not plan to actually begin operating out of the LLC until Jan 1 2017 because I figure it will simply be easier to begin fresh with the Calendar year.  I have several checking and savings accounts because I plan to operate from using the profit first framework.  The savings accounts require an initial deposit and keeping a balance so I want to transfer some money from my "personal" account that I have been using to keep the house money seperate from my "job" money.  I have two questions.

1) Is it dumb to wait, should I just start using it now that it is set up.

2) More importantly, can I just take money out of my personal account and go and deposit it into the new business account?  These are at 2 different banks and my personal bank is still in the 20th century so I can't just transfer it to create a nice paper trail.

...And just as an FYI, I do plan on seeing a CPA before Jan. 2017.  I just opened all the accounts before doing so because I didn't think about how I'm supposed to do the initial deposit and figured I had time before seeing a CPA.

Jerry W. · Answer

I learn so much here.  @Nick Ferguson, you have some great advice here, I am almost afraid to chime in.  There needs to be a reason for you to open and run a corporation or LLC.  They are all business entities and the question is what one will work best for YOU.  They all have good points and bad points.  An LLC for example has some benefits in keeping your property from being garnished and sold and often judgements are only allowed to put charging orders on the property.  Sub S corporations can help you avoid some taxes when your activity is no longer passive and can keep capital gains taxes down and allow you claim some gains as normal income.  You need to discuss your situation fully with your accountant.

I would also like to point out that @Bill Gulley is dead on about liability.  Your LLC is probably of little or no help as it doesn't own the property, and you self manage.  Unless you have a REALLY good reason from your accountant you are probably wasting your time on the LLC.  Do not forget to file a tax return for your LLC even though you have not done a thing with it.  The penalties for not filing are pretty rough.

Annette Hibbler · Answer

FYI S-Corps are expensive as they often incur higher state costs and taxes. Using the KISS phylosophy I'd stick with a simple LLC.  I have two or three LLCs, each used as an umbrella to hold several rentals under. I don't place more than 3 rentals in an LLC as a precaution against law suits. Don't just go to any accountant. Interview them and make sure they know the in's and out's of investment property.  Took me a while to find the right one.

Account Closed · Answer

@Steve Vaughan - You actually said I was "drinking kegs of the LLC kool-aid."

A single member LLC does not need to make an election. He would simply file business taxes on a Schedule C with his 1040.

@Nick Ferguson If it's a high performing property, all the more reason to form a LLC.  Don't hesitate to consult with an attorney and a CPA.

Steven Hickox · Answer

Dear Nick:  ALWAYS hold your real estate investments in SINGLE MEMBER LLCS.  You must be the only member even including your wife.  If you need partners then each partner creates their own single member LLC and you hold title collectively as tenants in common.  A single member LLC does not need a separate tax ID number but can be operated under your own SS#.  Also it need not file a separate tax return.

Nick Ferguson · Answer

Hey guys, thank you all for the excellent advice. You all have made some great points. I mentioned earlier not having the property owned by the LLC but I didn't really mention why I was using the LLC at all since, as pointed out, it really won't provide much if any liability coverage with the house being in my name.  Obviously, the liability protection is a big draw if I can ever get the house into it and I do plan on purchasing future houses into it if possible but the 2 main current reasons for the LLC are below.

#1. The specific property is a high performing investment that I want to keep totally separate from my personal finances. For how my brain works, I feel I will be more successful at planning and budgeting if I treat the business like a business. The LLC is an easy way to begin that personal mindset transformation from a "side thing" to a "business". I know that may not make the most sense to everyone and serves no tangible benefit but it will help me personally with mindset which I believe is important to success.

#2. The tangible aspect... Some of the financing options I have looked into will require the existence of an LLC or other entity to consider lending.  So I figured that since I want to get another property or 2 in 2017, I may as well at least have one in place now to show that experience prior to seeking a loan.

Again, thank you to everyone who has given advice.  This is great!

Nick Ferguson · Answer

Also, I should have mentioned.  I will be using the LLC to "operate the business" however the deed of the house is still in my personal name.  The reason is that the lenders I have spoken to so far (I'm still researching other lenders) will only do a HELOC on a rental if the property is in my name, not if it is in the LLC.  Also, I'm a little leery of the due on sale clause even though I know that is unlikely.  The hope is that future purchases will be purchased into the LLC and at the very least, properties will go into the LLC once they are paid off.

Does the fact that the property is not "in the business" affect how I will operate the money in and out of the business?

Steve Vaughan · Answer

Jim, all I said was that talking to a CPA about electing to be taxed as an s-corp vs a partnership with a mgt LLC may be beneficial.

Here in WA I chose to have an s-corp for my mgt co and active income activities.  That may be a cumbersome entity in OH and I get that.  You can still elect to have your LLC be taxed like one if your purpose involves receiving active income as opposed to passive.

Account Closed · Answer

@Justin Fox Sufficient insurance coverage is certainly important.

The LLC, if run separately and apart from personal matters, will protect you and cannot be pierced.

If one signs a personal guarantee as part of a business contract then the individual can be personally liable. Personal guarantees subject all personal assets to attachment by creditors.

Fraud, co-mingling of personal and LLC funds and assets, intentional negligence, misrepresentation, etc. may allow for the LLC to be pierced and subject an individual to personal liability. (Do a Google search for "piercing the corporate veil")

The mortgage is a debt instrument secured by collateral (the property) to ensure that the bank is paid. The mortgage has nothing to do with titled ownership of the property. The deed sets forth the titled owner.

Account Closed · Answer

In order to shield your personal assets from liability, you should begin using the LLC now.  Transfer title to the property to the LLC and then conduct all business in the name of the LLC - leases, insurance, have tenants pay the LLC, pay all bills from the LLC account, etc.

Deposits to the LLC are owner's equity (capital contributions). Your initial deposit to the LLC would be opening balance - equity and then future deposits are additional equity.  If you take money out it's a member or owner's draw.

Talk to a CPA now before tax season begins on Jan. 1st.  CPAs will be very busy from Jan. 1st through the end of April.

Bill Gulley · Answer

One house? Your liability exposure is greater driving your car than owning a house as a rental, especially an encumbered rental.

Since you personally own the place and in reality, you manage it, I would doubt your LLC will be that effective, such are pretty easy to break through, but see your attorney.

As to money, you  have initial and may have additional contributions to owner's capital, your account will explain this. Checks you write off the company must be direct company expenses for business use, otherwise checks are written to you as a repayment of your capital contribution or as income, after your contributions have been returned, it's income, again see your accountant.

Thing about the due on sale, even if not a high probability, it does happen and you'll never know if you're the one who does get nailed. How well do you sleep?

IMO, you jumped the gun forming this company, you also need to check with your state as to management by a company for a property you own. It's possible you'll need a license and understand that a non-attorney can't really represent a business entity in courts, you may own it but you'll need an attorney to do minor proceedings.

See a local attorney before you spend more money and time managing something that is nothing more than a shell entity that isn't properly funded. :)

How to put money into LLC without "co-mingling"

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