LLC protection and bank accounts/ credit cards

[Amy Niederhauser]

Hey!! {first time posting}... So, I have a handful of rental properties in my name and I'm in the process of transferring each of them into their own LLCs, and I was curious if I can use one bank account and one credit card for ALL of my "rental property business"? This is my only source of income, so I am claiming all rental income on Schedule E and I'm the sole member of each LLC so everything is basically tied to my SSN anyway... As far as book keeping, I will still keep records of everything according to individual property (for my own knowledge and in case of audit/ lawsuit/ etc) but, since I technically will be combining all the properties' supplies into one dollar amount reported on my tax return, and all the properties' repairs into one number, etc etc.. doesn't it make sense to just use one bank account/ credit card? If I am keeping everything "rental/business" related in one account, and then everything personal in a separate account, I'm not co-mingling funds, am I? If this will work and is safe... then all I have left to do is- have one checking account and credit card for all rentals (like I mentioned), and then create an LLC name for each property, a certificate of organization for each, create operating agreements for each property, do quit-claim deeds for all, put all bills into associated LLC names, and then make sure to use the LLCs name on all leases... right? Am I missing anything?? I've only ever had ONE rental property for the past decade and this year since I've discovered Bigger Pockets podcast, I've added more to my portfolio and just want to make sure I am keeping things as simple as possible, but also making sure I am protected and doing everything by the book. Thank you so much for all of your insight! :) Cheers...

[David M.]

@Amy Niederhauser

Well... Each LLC needs to operate as its entity, its own business. So, it will need its own bank account. Taking the plunge into using entities is all about how do you want to spend to achieve and maintain the additional asset protection. If you have multiple LLC's sharing the same bank account, you are co-mingling funds. You are just co-mingling business funds. Now, if you thought you isolated the LLC's from each other, you actually pierced their corporate veils and just joined all their liability. We just had a discussion on this topic here.

https://www.biggerpockets.com/forums/311/topics/859163-with-multiple-llcs-master-bank-account-or-individual-accounts

You might get away with it if you use a series LLC, but they aren't available in all States. Also, series LLC's are new so the talk is the legal precedence isn't well established for them.

As for the transferring...  That's been talked to death on BP.  Here are some threads that I quickly found

https://www.biggerpockets.com/forums/12/topics/856842-first-rental-should-we-set-up-an-llc
https://www.biggerpockets.com/forums/61/topics/827155-starting-an-llc-after-two-properties
https://www.biggerpockets.com/forums/12/topics/857789-creating-llc-prior-to-purchase-of-first-property
https://www.biggerpockets.com/forums/52/topics/848626-questions-about-putting-a-property-into-an-llc
https://www.biggerpockets.com/forums/12/topics/854526-do-you-setup-an-llc-for-each-property

As long as you know what you are getting into and realize the additional costs.  The big one usually are the loans.  People want the legal asset protection of a legal entity but don't want to pay for getting commercial loans.  Instead, they move Title to their name, take out a residential loan, then move Title back again.  Now, its mixed.

It sounds like in your case you are trying to convert just once.  Of course, you should be talking to multiple qualified professionals instead of getting advice from a layman over a public website....

Make sure that you don't invalidate your Title Insurance Policy. When you change ownership to a LLC and the Title Policy is in your name, you no longer have and an insurable interest so the policy is null and void, or something like that. So, you may have to pay for a whole new Title Policy.

You are going to have to roll dice on whether your Due on Sale clause will ever be triggered/called in by the lender.  I've ran into "grey haired" investors and professional who have never had it or seen it happen, and then I have run into those who have seen it...

Don't forget to inform your insurance company. Again, its back to that insurance interest issue and the fact the policy has to be updated to reflect the LLC as the owner and thus the insured party. This may trigger an update to your loan servicer since the mortgage clause on the loan will need to be updated. Remember, the holder of your note is an additional insured (or something like that). Furthermore, you'll still want insurance even though the property is in a LLC for both the simple sake of having property insurance, but also for liability protection. If you are sued, at least the insurance company will be paying the legal fees. Otherwise, you will have to foot legal fees to protect your asset --- unless, I guess, you just fold and don't contest and abandon the LLC (which probably would be cheaper depending on how much equity you have left in the property).

To the best of my understanding, you'll need an attorney to draft up some sort of agreement between yourself and the LLC "informally" assuming the loan or something. Again, you are trying to avoid co-mingling. Your loans are taken out under your name. But, Title is held by the LLC. Which bank account pays for the loan?? How do which funds get into that bank account? While only two types of residential loans are officially assumable (which requires getting re-qualified), the rest will need to be setup so that the LLC is probably paying for the loan. You've mentioned co-mingling so at least you have an understanding of the problem. You need to keep all the flow of money well regulated.

FYI: LLC's have Articles of Formation.

In terms of doing things "right," that's is up to your risk tolerance. You only have one property? People here have several single family rentals in their own name and don't bother with having a LLC. I'm not sure if you are asking for this "sermon" so I won't go into it.

As far as naming your LLC, its common (but I mention it because is seems people don't always realize it) to name the LLC the street address the property. Its a very good chance that the name will be free. Furthermore, it will help you keep track which LLC goes with which. You'll need a bank account for each LLC and don't forget to get at least one book of checks. That's fine if you want to get business credit cards, but after a while it might start to get a lot of credit cards, and I'm not sure much credit will be extended to you.

As far as accounting, I just use Excel.  One sheet per rental.  The expenses are categorized and summed by the SchE categories for easy tax filing.  A separate sheet sums every other sheet for easy viewing and calculating the passive allowed losses for tax filing.  But, other people will use QB or I believe Stessa or Stressa (sp?) was another recommendation.  Below is another thread which goes into the accounting and the multiple bank accounts again...

https://www.biggerpockets.com/forums/311/topics/859163-with-multiple-llcs-master-bank-account-or-individual-accounts

One more thing about your line of thought. It sounds like you its just you doing this, so it will be a single member LLC. This type of LLC by default is considered a disregarded entity by the Federal IRS. They choose not to recognize its existence which is why you use the standard bevy of 1040 forms to do your tax filing. If you have two or more members (N.B. Members are the owners in a LLC), then it by default is taxed as a partnership. All that being said, what happens at the State level is a different matter. Remember, LLC's are formed by State --- they are State entities. This is why even though you are "lumping" everything together on your Federal tax return, you need to treat each entity separately. They are supposed to be their own legal entities standing on their own. Once they are used as an "alter ego," their corporate veil is pierced and they lose the legal asset protection you spent so much effort protecting.

I hope this helps.  Feel free to direct message me if you want to chat.  Good luck.