How to structure bank accounts and business vs. personal

Question

My wife and I are in the process of filing for an LLC through an attorney before we start our rental business in a few months.  I have some questions about how I should structure my bank accounts and which need to be business accounts.

In order to maximize the protection of the LLC, I'm wanting the rent collection account to be a business account in the name of the LLC.  What I'm wondering is, once this money comes in, can the money be transferred to personal accounts in my name with no loss of protection?  I want to have separate accounts to set money aside for income tax, property tax, maintenance, security deposits, etc.  Having these as personal accounts would make it easier to manage but the main thing is I would save money on business account fees.

I guess the main thing I'm wondering is is it okay if I use personal accounts as digital envelopes for setting aside money each month so I can better plan for year-end expenses, or does everything need to be in business accounts?  I'm the kind of person that has about 10 personal checking accounts that I use for various things and I like keeping my money separated than in one big pile.

Jana Cain · Answer

@Ryan Morlino Yes - if you're seeking to separate out your business funds for different business purposes, you should use business bank accounts to do so. You are correct that using one main operating account is more common, with likely a savings account for the lump sum of all the reserves if they don't leave the funds sitting in the operating account. You can then account for the "earmarking" on the bookkeeping side.

I'm sure others have different methods of tracking their reserves, but this is one way to do it.

Patrick Liska · Answer

Ryan,

I have one Business checking account for each llc. the rents get deposited directly to the accounts by my PM. All my mortgages are with that bank as well. when mortgage is due i transfer the payment from the appropriate account, and when bills are due i have them removed from the appropriate account as well ( can use the banks bill pay or direct payment on the website of whoever you are paying ), electric, water/ sewer, etc. I let the money build up some, for emergency purposes. If you feel you are covered then you can simply "pay yourself" you are allowed to make draws from the business, write yourself a check, or your wife, kids. check all this with your Attorney and CPA before you take my advice, or anyone else.

Jana Cain · Answer

@Ryan Morlino If your goal is to create a clear line between business money movement and personal money movement, you should use business [labeled] accounts as your "digital envelopes". For example, a main operating checking account, a security deposit account, and then separate savings accounts for your taxes, maintenance, etc. Parking business money earmarked for business expenses in personal accounts is not going to show a distinction between business vs personal monies.

I compartmentalize my savings as well, so I totally get what you're trying to do.

Account Closed · Answer

Ryan- I am currently operating my LLC as follows:

All income gets deposited into the LLC checking account

All business expenses get paid out of that same checking account (online bill pay)

Since it is a credit union, I can create sub accounts ("share"accounts- individually numbered savings accts) under the main account

At the beginning of the month, I online transfer set amounts out of the chkng acct into the "tax", "insurance","heat/misc" share sub accounts

Since chkng accts are vulnerable to outside influence (counterfeit check, invalid ACH withdraws), I sweep excess funds into a separate share acct

I do an ACH transfer of my monthly draw into my personal chkng acct

Thruout the month, i'll reverse sweep funds back into the main chkng acct for bill paying as needed.

When the "funds sweep" holding acct gets too large, I transfer funds out of the LLC into a personal savings acct (the thought here is that my rental activities are far more susceptible to a lawsuit than my personal life. Any movement of money AFTER a lawsuit is filed may be reversed by a court as an attempt to hide company assets- I don't know this to be true but, why risk it).

When a large bill (tax, insurance...) comes due, the money is waiting to be transferred into the chkng acct.

Personally, I would never write a chk out of my business acct to my wife or kids- it just raises questions about "that line"..... do that out of your personal acct.  Keep it totally transparent.

Hope that helps.

Ryan Morlino · Answer

Thanks for all the input! I greatly appreciate the feed back.

I want to clarify my intent, in that I was asking about having a separate personal account being used exclusively by the LLC, not necessarily commingling personal and business funds in the same account. I had a suspicion that this really ought to be a business checking account owned by the LLC, but just wanted some input on that. I'm fully aware that commingling funds is a recipe for disaster.

As to why I want multiple accounts, I think it's because I'm trying to apply the way I do my personal finances to business practice. I'm an engineer and the way I have things set up works perfect for my personal life, but I'm beginning to see how that won't transfer well into business finances. Now that I've had a few more hours to play around with Quickbooks, I'm starting to see how one account can do it all and I can keep track of different buckets of money within one account.

I've decided the best thing to do is what's been suggested. I'll open one business account in the name of the LLC and manage it in Quickbooks.

Thanks to everyone for the input and helping me think this through.

Johann Jells · Answer

All those accounts sound over complicated to me and a good way to bounce checks. You should use software for planning and management, not separate accounts for each expense category. One checking account that rents go in and expenses go out. One escrow account with subs for securities. You can have a MM sweep if you want too, not that they really pay anything. Personal accounts are just that, nothing to do with the business.

Lana Matovcik · Answer

if you are trying to insulate your personal assets from your potential liabilities from the rental propertis, the rental properties need to be owned by the LLC. No maount of sgregating bank accounts will insulate the property owner from liability.

John Bauer · Answer

@Ryan Morlino I am a collections attorney, and our firm often garnishes wages and bank accounts in an attempt to collect on judgments that have not yet been paid. Business owners who owe money on judgments regularly tell me that they have personal and business funds co-mingled in their personal bank accounts. However, most often, when we garnish funds that are in personal accounts, funds that came from a business are not exempt. I am not your attorney, and I do not know the law in your jurisdiction, but if your goal is to maximize the protection of the LLC, it may be wise to keep business and personal money separate.

Ryan Morlino · Answer

Thanks Jana! So you are suggesting that every account I use should be a business account owned by the LLC?  I'll have to do more research into banks with low/no fees for small business owners.

I'm not an accountant, so some of this is foreign to me but I'm trying to learn.  As I play around with Quickbooks, I might be able to work with one operating account and I can code money into different accounts on there. I'm currently trying to see how that would look on my Quickbooks account right now.  From the research I've done, it seems like most people use one main operating account and earmark the money for different purposes on the bookkeeping side, rather than use separate accounts.  Am I right in thinking that?

How to structure bank accounts and business vs. personal

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