Banking / Financing FAQ

Forming An LLC As A Holding Company For Personal Assets

I will be forming an LLC where I will be the sole member/owner to open a business bank account. I will initially transfer an amount X of money from my personal bank account to this LLC account. The LLC will not conduct any actual business, it will only serve as a “holding” company for my transferred money. The LLC account is a checking account with no earned interest. As such it will not generate any income. I will be using this LLC account only for my personal expenses (cash withdrawal, credit card expenses, etc). Is this intended use legal? Will the initial funding of my LLC account from my personal account be treated as an income for the LLC and subject to taxes? Are there any other  tax considerations I should be worried about being that the account will only have expenses and no income? I’m not a US resident or US citizen. Thanks.

– Federico

 

Answer

Most states do not allow an LLC to be formed that do not have a business purpose and as such those LLCs can’t be used to hold an asset to protect it from creditors.  Nevada is the only exception that comes to mind, but there may be more.  So for most states, any assets held by the LLC should have a business purpose, such as running a coffee shop or renting a house, otherwise you run the risk of having the corporate veil pierced and opening those assets to creditors. 
 
Since there would be no business activity or income, there would be no impact to your taxes.  
Many non-U.S. citizens choose to form an LLC because they are unable to own an S-corp which have similar tax treatment and usually much better than C-corps.

Why Does My Bank Refuse To Move Property Into LLC?

I opened an LLC for the purposes of owning rental property. However, after forming the LLC and asking the bank about it, the mortgage bank indicated that they do not allow the transfer of the loan into an LLC (Wells Fargo). What should I do? According to my lawyer, this is more and more common these days. I know there is a difference between transferring the loan and transferring the title into the LLC. Is there anything I can do?

– Rob, North Carolina

Answer

It’s the due on sale/ due on transfer clause that is gumming up the works.

In practical terms, you need to find someone at the mortgage company with authority to transfer the loan. This is probably difficult, because all these loans have been collateralized and securitized by Wall Street and nobody really knows who owns what.

Your best bet is to try to find a company that will refinance the loan in the LLC’s name–basically selling the property from you to the LLC. The problem is there might be tax consequences (talk with your lawyer), plus whoever refinances the property will probably want a personal guarantee from you on the mortgage.

In the old days, when banks held mortgages themselves and Wall Street wasn’t involved, you might have been able to work this out if you had a good relationship with the banker. Today, it’s a real pain, and you’ll need to get creative (or get a creative lawyer).

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Can An LLC That Owns Real Estate And A Business Also Be The Same LLC For A Self-Directed IRA?

I am interested in putting my assets–thus far two parcels of land–into an LLC as a holding company. I would also like to open my own advertising business, and put that into an LLC. Additionally, I would like to roll over my current 401(k)plan into a self directed IRA LLC. Can all of these be housed under the same LLC umbrella?

I do not want all of the funds I have, obviously, to be in the name of a retirement fund. I’m thinking that I need at least two LLCs legally. Can you please offer advice or an opinion?

– Lou, California

Answer

I don’t give legal advice here, however, I can answer a few of your questions.

But first, I need to ask why do you want your IRA in an LLC?

Your assets in an IRA are fairly well protected against creditors, and in bankruptcy. Did someone suggest to you to put your IRA in an LLC for estate planning or other purposes?

As far as your land and advertising business, you definitely want those separated into two LLCs.

You almost never want real estate (particularly developed real estate, but also land) in the same entity as your operating business.

The risk of liability crossing from one business/asset to the other is very great.

A problem in your advertising business can result in your losing your land, or vice versa, if all those assets are in a single LLC.

Land can be contaminated, for example, and the environmental laws hold the owner responsible even if the contamination is the result of other people dumping toxins on your property in the middle of the night! I once had a client who was threatened with millions of dollars in cleanup costs from the state government because the city had once operated a landfill, which leaked, on my client’s property. Even though the city was at fault, the state forced the client to pay for remediation, and it was up to the client to seek reimbursement from the city. Fortunately we worked out a settlement, albeit after significant legal fees. The last thing you want to do is expose all your assets to that type of risk

If the real estate is to be used by your business, the simple solution is to have your real estate LLC lease the land or building to your business LLC. This also allows you to move money around between entities for tax purposes, although that is a more advanced topic to discuss with a CPA.

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Startup Capital For A Coffeehouse LLC

I’m attempting to start up a coffeehouse and want to maintain control of my venture, but don’t have the necessary capital saved up to begin operations. To make it simple, let’s say I have $5K saved, but need $50K to start up. If I raise the needed funds from various investors, is there a way to maintain single ownership? By default, if someone is willing to invest $10K into my venture, doesn’t that give them majority ownership? — Seth,Nevada

Response:
Not at all.

In fact, someone could lend you $10k and have zero ownership in the company–instead, they get a promissory note.

This is the essence of a loan.

Furthermore, ownership of the company is NOT necessarily proportional to capital invested. If these investors are passive investors, and you are actively running the business, it would make sense for you to have a greater ownership than just your proportion of capital.

I would first explore a setup where the investors are loaning you money, perhaps with a healthy interest rate and even a kicker based on profits.

There is no rule that says that you have to give up majority control in order to fund your business.

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Can We Contribute Personal Funds To Our LLC?

I have an LLC, we are starting to run low on funds as our LLC was established for our ghost hunting club. This was so we could legally accept funds for tours and the like. But our funds are just about depleted and we still have expenses related to web site and the like. As well as the tax preparation in January that will empty the rest of our funds.

Is there a law against us contributing our own personal funds into the LLC, we are a partnership LLC? So this is what we must do to keep things going. So, do we just fill out more membership shares related to the contribution? Or can we just deposit the funds right into the LLC?? Please help as we don’t want to go about this in the wrong way as we just formed our LLC. Thank you.

– Rob, New Jersey

Answer

There is no problem with contributing additional funds to your LLC. Simply deposit the money into the LLC’s bank account.

You can contribute the money either as a loan to the LLC, repayable to the member who contributed the funds, or as a capital contribution.

You do not have to issue additional membership interests for the capital contribution, nor transfer membership interests/units between members.

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Question About Depositing Checks Into LLC Bank Account

I assume I will occasionally get a check payment from a client made payable to my personal name instead of the LLC name. So, I plan to set up the LLC’s bank account to accept deposits with either name. Is this a problem (with respect to protecting the “corporate veil”, i.e., the appearance of commingling business and personal funds)? Does it matter if this occurs rarely vs often? Thanks!

– JD, Colorado

Answer

This does happen occasionally, and no matter how many times you tell your clients otherwise, they will send checks in your name.

As an attorney, I have accidentally received settlement checks in my personal name instead of the name of the firm I work for (and my name isn’t part of the firm name).

I simply sign the back of these checks and hand them to the office manager and everything works out fine.

As far as your corporate veil goes, yes, this is technically commingling.

The most dangerous kind of commingling is taking checks written out to your LLC and depositing them in your own account–not the other way around as you’re describing.

If this happens infrequently, I would not be too concerned.

Remember too that commingling is only one factor in veil piercing, and is by itself usually insufficient–there needs to be some element of fraud or other unjust behavior on your part to justify piercing the veil. In other words, the commingling that gets a veil pierced is when it is associated with the underlying fraud. A typical example is an owner of a company draining company funds for personal expenses instead of paying the company’s creditors.

There is nothing unjust or fraudulent about depositing a check into your LLC account that was written to pay for services/products provided by your LLC simply because your client wrote the wrong name on the check.

In conclusion: encourage your clients to write a check to the proper name, but don’t let it keep you up at night if you get the occasional check written to you personally instead of for the business.

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Using My Home Address As An LLC address

Using your home address for your LLC address, won’t that be a bit confusing in terms of your personal bills, utilities, even to your mail carrier, etc? Won’t that seem as if you’re already commingling your business with your personal life?

Secondly, could you further explain what is looked at as commingling your business funds with your personal funds. You stated you can pay yourself everyday from your LLC, how is that not viewed as commingling? Where is the line drawn?

Thanks for all your help!

– Jackie, Missouri

Answer

We have clients in the real estate business who have dozens of separate LLCs (usually one per property or group of properties), and they all use the same office address. It’s a very common practice.

As far as using your home address, that shouldn’t cause a commingling problem. Sure your company bills come to your home, as well as your personal utility bills–but, you’re not paying your personal utility bills with company checks, right?

In the new rental home I’m in, I sometimes get junk mail addressed to a home based business that the previous tenant ran. It never caused or causes a problem. Mail carriers are used to multiple people living at, and businesses receiving mail at, the same address.

Think about commingling this way, using a job as an example.

You receive a paycheck from your employer. It’s a check written on the employer’s bank account to you. You deposit the check in your bank account. From your bank account you pay all your personal bills.

Now, commingling would be if you took a couple of blank company checks from your employer and used them to pay your personal bills.

To avoid commingling, then, you simply need to only write the following kinds of checks from your LLC bank account:

1. Checks for the LLC’s business expenses;

2. Checks for profit distributions to the LLC’s members.

If you do that, then you are not commingling funds.

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Is Transferring Money From A Business Account The Same As Writing A Check?

I recently formed an LLC from a sole proprietorship. Knowing that I’ll have to be more diligent about separating funds, is transferring money from a business account to a personal account the same as writing a check in order to get paid?

Also, I use an online billpay service with my bank to pay bills for both my business and personal debts. Since my business is a home based business, which account should I use to pay the bills associated with my home/place of business i.e. the mortgage, water, light, etc. since I use them all for both business and personal use?

– Stephen, Washington

Answer

When you withdraw your profits from your LLC, you simply write a check drawn off your business checking account payable to yourself.

For your business expenses, ideally you would pay for them directly from your business account (or a credit card in the name of your business, which is paid with money drawn from your business checking account).

So, stop paying business expenses from your personal account–whether you are using paper checks or online bill pay.

All business expenses should be paid from your business checking account. This makes tax time more simple, because all your expenses are right there on your business checking account statement–no need trying to figure out if a check was for a business or personal expense.

Where it gets tricky is with the home office deduction, where there is a partial use of the home for business and partial permanent.

What you’d want to do here is pay your mortgage through your personal account, but then take the home office deduction using IRS Form 8829.

These are the basics of how to handle business expenses for tax purposes.

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Lottery Winnings And The Benefits Of An LLC And Trust

If I win a large lottery amount over 30 million what are the benefits to me having a family trust or foundation and a LLC. Will I be able to pay less taxes and financially benefit others members of my family without them having to pay such high amounts of gift taxes, or any tax at at?

Answer

If you win $30 million in the lottery, hire a local attorney and accountant!

If you win $30 million and search for free advice on the internet INSTEAD OF hiring your own attorney and accountant, you are an absolute fool. If there is any justice in the Universe you will be parted with your lottery winnings as quickly as humanly possible.

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SMLLC And Banking

If a person has several SMLLCs, are they allowed to use their individual name and TIN when opening bank accounts for each SMLLC or do they have to use the SMLLC name and EIN?

The SMLLC has no employees.

Answer

I would advise that you open LLC bank accounts using the LLC’s name and EIN.

Otherwise, those accounts are in your own name, and therefore are your assets, and you really have not segregated your business and personal assets at all. It’s commingling in a serious way.

A bank might be willing to work with you on reducing fees (or eliminating them), so that having multiple accounts doesn’t eat you alive in fees. Ask around…in this environment, I think banks should be happy to get any new deposits!

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Questions About Personally Funding Your New LLC

You have to use your money to start your business. Is it wise to put your money in your business bank account when you first open it and then proceed to purchase things for your business out of that account to be able to track everything accurately for taxes and other breaks?

Answer

Absolutely!

You do NOT want to put your startup business expenses on a personal credit card. That would technically be commingling of funds (though, in reality, it takes a lot to pierce the corporate veil, so don’t lose too much sleep over it).

—Note—
The above does NOT apply to the expenses you incur in forming your LLC. Obviously you won’t have a business credit card or business account before your form your LLC. So, formation costs and state filing fees you can pay personally. Buying equipment for your business after it is formed…use a business check or credit card.
—Note—

It’s bad business practice to mix your personal and business funds. Even if a judge wouldn’t pierce your veil for mere sloppy business practice (though you’re rolling the dice, because you never know what kind of judge you’ll get), why be sloppy?

You can pay for the initial LLC formation with personal funds, as the company does not yet exist. Those expenses can be considered a capital contribution to the LLC.

After formation, and you have an EIN, go directly to the bank and open up a business checking account. You’ll need the EIN because banks won’t open an account without one.

All of your business expenses must be written out of your business checking account.

If you need a credit card for your business, then apply for a business credit card. Trust me, you’ll start getting offers in the mail very quickly after forming your LLC–particularly if you use your home address as your registered agent.

Will your business need a Paypal account? Then get one in your business’ name, using your business EIN.

Finally, buy a copy of Quickbooks and use it to track your business expenses.

If you have employees, you absolutely need to use a payroll service. Do not attempt payroll on your own…trying to do your own payroll is like trying to do your own laser eye surgery.

As owner, you are personally liable for all payroll taxes that you fail to pay. These debts are difficult to discharge in bankruptcy and the IRS can follow you around for a long time, racking up penalties and interest.

A followup question on the same topic:

Funding Your New LLC

Question: Can you continuously put money into your business account from your personal account to fund your business like to purchase equipment and pay for utilities until you start receiving a profit from it? Would that be perceived as commingling?

Answer

Yes, you can fund your business with personal funds (in fact, every business has to even if just to pay for incorporation, legal, accounting and state filing fees).

The key here is to understand that “you” and the LLC are legally separate individuals.

Which means that if you are giving money to your LLC, you need to be getting something in return — either you are making a capital contribution to the LLC or you are loaning it money.

You wouldn’t give money to some random corporation unless you got either stock or a bond in return–the same principle applies here.

The key is to create the proper paper trail, in particular, through the use of promissory notes if you are treating the deposit as a loan.

There are many forms of promissory notes you can download for free on the internet, and some you can pay for.

More followup questions
Using personal account to buy equipment for business

Question: Ex boss is selling equipment from his business at great price.He is giving us first pick before he auctions it off. Problem is LLC paperwork will not be processed in time to be able to open a business account to pay for it. Can we use personal account to purchase equipment as start up or would that be commingling of funds. He won’t hold the equipment.

Answer

You can buy the equipment with personal funds and then sell them to the LLC. Just make sure to writeup a receipt and have the LLC pay you for the equipment.

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What Is The Best Way To Start Financing Real Estate?

When would be the best time to form an LLC, after first property? Should I purchase with personal credit then quitclaim to the LLC to start out? Does it help business credit to do this? Any recommendations would be great.

Answer

Even in good markets, for most LLCs, banks are going to require your personal guarantee regardless.

However, having the property in an LLC is good liability protection for you personally for liabilities other than the mortgage debt.

Here’s what I mean. If you own the property in your own name, if someone slips and falls on your property, or if there’s an environmental problem that insurance doesn’t cover (and they don’t cover much–read the “pollution exclusions” in your policy), then you are personally on the hook. Environmental laws are particularly nasty, and the EPA and state agencies don’t care who caused the problem, if you own it, you are liable.

On the other hand, having your property in an LLC will protect you personally from the slip and falls and environmental problems (assuming that you weren’t personally dumping stuff on the property yourself).

In terms of the right order to do things in? Either way will probably work. If you’re interested in building business credit, I would suggest having the LLC take out the loan. Understand that you will have to personally guarantee it, but at least the LLC will be building a credit record, and you will have insulated yourself from all liabilities associated with the property EXCEPT the mortgage note you personally guaranteed.

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When To Start Establishing Business Credit As An LLC?

I want to start purchasing residential rental property, when should start establishing business credit? Can I form an LLC and build credit before I even buy property?

Answer

You can begin establishing business credit as soon as your LLC is created.

Your LLC establishes credit by doing things such as opening business credit cards, obtaining a Dun and Bradstreet number, and taking out loans.

The LLCs establishes GOOD credit by making timely payments on the above.

In terms of purchasing property, it is unlikely that even “good” business credit, if your LLC is small, will ever get a mortgage that is “non-recourse”.

By non-recourse, I mean a mortgage where you won’t have to personally guarantee the note.

In most situations, a lender will require that the owners/officers of the LLC personally guarantee the mortgage.

For example, I’ve worked with companies that have owned commercial real estate for 30 years and the lender still requires personal guarantees from the owners.

With large, well established LLCs (such as a public company), they can get financing without a personal guarantee of an officer.

But for a small real estate investor, the lender will almost certainly require that you guarantee the note.

Where business credit comes in handy is in establishing lines of credit with suppliers and credit cards without a personal guarantee. While a brand new LLC is unlikely to obtain credit without a personal guarantee, over time, with a good payment history to creditors that is reported to Dunn & Bradstreet, your company can establish business credit.

So yes, the sooner your business starts establishing a credit history, the sooner it will be able to obtain credit.

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