When To Open A Bank Account For Your LLC?

Summary

This video explores the necessity of bank accounts for Limited Liability Companies (LLCs). It clarifies misconceptions about the need for a bank account to legitimize a business and emphasizes that the requirement depends on the business type and operational needs. The speaker uses real estate examples to illustrate scenarios where bank accounts are essential, such as when self-managing properties, and where they are optional, like when using a property management company. The video also addresses the legal concept of 'piercing the corporate veil' and refutes the notion that lacking a bank account could lead to this. It concludes with advice on maintaining good bookkeeping practices for LLCs, regardless of bank account setup.

Takeaways

• 🏦 The necessity of a bank account for an LLC depends on the type of business and its operational needs rather than being a requirement for legitimacy.
• 📚 It's a misconception that an LLC must have a bank account to be considered a legitimate business entity.
• 🤔 The decision to set up a bank account for an LLC should be based on whether it's needed to conduct the business's necessary activities.
• 🏠 In the context of real estate, if an LLC owns a rental property and a property management company handles the funds, a separate bank account for the LLC may not be necessary.
• 📈 For real estate investment, a Wyoming holding LLC is often used to own multiple special-purpose LLCs, each potentially owning a property.
• 🧐 It's important to maintain good bookkeeping and records to track income and expenses for each property within a holding LLC structure.
• 🚫 Tenants should never pay rent directly to a holding LLC, as this entity should not be conducting business in the state where the property is located.
• 💼 If an LLC is actively managing properties, it's recommended to create a separate bank account for each LLC to handle tenant payments.
• 🛠️ Creating a property management entity can help centralize tenant payments and reduce the need for multiple LLC bank accounts.
• 📊 For active businesses like a management service organization, a bank account is essential to receive payments for services provided.
• 💡 The decision to set up bank accounts should consider the business's passive or active nature and the potential for compartmentalizing income and expenses.

Q & A

Is it mandatory for an LLC to have a bank account?

No, it is not mandatory for an LLC to have a bank account. The necessity depends on the type of business and whether a bank account is needed to conduct the business activities.

What is the purpose of a Wyoming holding LLC in the context of the script?

In the script, a Wyoming holding LLC is used to own multiple real estate special-purpose LLCs. It serves as an umbrella entity to manage and hold the assets of the individual LLCs.

Why might an LLC not need a bank account for collecting rents?

An LLC might not need a bank account for collecting rents if a property management company is handling the collection and remittance of funds directly to the owner or holding company.

What is the significance of having a property management company (PM) in the scenario described?

The significance of having a PM is that it allows the property owner, who may not be managing the properties themselves, to have the rents collected and remitted to them or their holding company without needing individual bank accounts for each LLC.

Why would someone choose not to create bank accounts for individual LLCs owning rental properties?

Some clients choose not to create bank accounts for individual LLCs because the property manager collects the rents and sends a single wire with an owner's statement to the holding company, simplifying the process and reducing the need for multiple accounts.

What are the benefits of having a Wyoming holding LLC?

The benefits of having a Wyoming holding LLC include centralized management of assets, potential tax advantages, and the ability to segregate income and expenses for each property while maintaining a single bank account for the holding company.

What is the importance of maintaining good books and records when using a holding company structure?

Maintaining good books and records is crucial for tracking the income, expenses, capital expenditures, and other financial details of each property. It also helps in demonstrating the legitimacy and separateness of each LLC in case of legal challenges.

Can tenants pay directly to the Wyoming holding LLC?

No, tenants should never pay the Wyoming holding LLC directly. The holding LLC does not conduct business in the state where the property is located and should not be involved in rent collection.

What is the recommended approach if an LLC owner is self-managing properties within their state of residence?

If an LLC owner is self-managing properties within their state of residence, it is recommended to create a separate bank account for each LLC to handle the collection of rents and management of property-related finances.

How can an LLC owner minimize the number of bank accounts needed while self-managing properties?

An LLC owner can minimize the number of bank accounts by setting up a property management entity, which can be an LLC or a disregarded entity, to handle the collection of rents and interaction with tenants on behalf of the individual property LLCs.

What is the role of a Management Service Organization (MSO) in the context of the script?

In the script, an MSO is set up to manage various enterprises such as medical practices. It is an active business that requires a bank account to receive payments for the management services it provides.

What is the general rule for determining if an LLC needs a bank account for its business activities?

The general rule is that if the LLC is engaged in an active business that receives funds for the services it provides, it will need a bank account. For passive activities, an analysis can be done to determine if a bank account is necessary or if there's an alternative structure in place.

Outlines

00:00

🏦 Necessity of Bank Accounts for LLCs

This paragraph discusses the common misconceptions about the necessity of bank accounts for Limited Liability Companies (LLCs). It challenges the idea that an LLC must have a bank account to be considered a legitimate business. The speaker explains that the need for a bank account depends on the type of business and its operational requirements. The paragraph also addresses concerns about 'piercing the corporate veil' and emphasizes that having a bank account is not the sole criterion for an LLC to be respected by the legal system. Examples are given, particularly in the context of real estate, to illustrate different scenarios where an LLC might or might not need a bank account.

05:01

🤔 Evaluating Bank Accounts for Real Estate LLCs

The speaker provides a detailed analysis of when bank accounts are needed for real estate-focused LLCs. They explain that if an LLC owns a property and a property management company (PM) is handling the rentals, it might not be necessary to have a separate bank account for each LLC, as the PM can collect rents and remit them to a holding company. However, if the LLC owner is self-managing properties within their state of residence, it is recommended to have a separate bank account for each LLC to avoid commingling funds and to maintain the legal separation between entities. The paragraph also suggests creating a property management entity as an alternative to reduce the number of bank accounts needed.

10:03

📚 Importance of Bookkeeping and Record Keeping

This paragraph emphasizes the importance of maintaining accurate books and records for an LLC, regardless of whether it has a separate bank account or not. The speaker explains that good bookkeeping is essential to track income, expenses, and capital expenditures for each property within an LLC. It is crucial for demonstrating the legitimacy of the business and the separateness of each LLC entity, which can be particularly important in the event of a legal challenge. The paragraph also refutes the myth that an LLC must have a bank account to avoid having its corporate veil pierced, stating that there is no legal precedent for such a claim.

🏢 Bank Accounts for Active Businesses vs. Passive Investments

The final paragraph of the script differentiates between the need for bank accounts in active businesses versus passive investments. The speaker uses the example of a Management Service Organization (MSO) that actively manages medical practices, which necessitates a bank account due to the active financial transactions involved. The paragraph concludes with a general recommendation that if an LLC is engaged in passive activities, one can assess whether a bank account is truly needed or if there are alternative structures that can be used to manage funds. The speaker also acknowledges the potential hassle and fees associated with maintaining multiple bank accounts.

Keywords

💡LLC

LLC stands for Limited Liability Company, which is a type of business structure that combines the flexibility of a partnership with the limited liability protection of a corporation. In the video, the theme revolves around whether an LLC needs a bank account. The script discusses various scenarios where an LLC might or might not require a bank account, emphasizing that it depends on the nature of the business and its operational needs.

💡Bank Account

A bank account is a financial account maintained by an individual, business, or other entity with a bank or financial institution. In the video, the necessity of a bank account for an LLC is a central point of discussion. The script explores different situations where an LLC might need a bank account to conduct business activities, such as collecting rents or managing properties.

💡Piercing the Veil

Piercing the corporate veil is a legal concept where the courts ignore the separate legal entity of a corporation and hold the shareholders or parent company responsible for the corporation's obligations. In the video, the speaker clarifies misconceptions about piercing the veil of an LLC due to the absence of a bank account, emphasizing that having a bank account is not the sole criterion for maintaining an LLC's legal protection.

💡Real Estate

Real estate refers to land, as well as any permanent fixtures attached to the land, such as buildings and houses. The script provides examples of real estate investment scenarios where an LLC might be used to hold rental properties. The discussion includes whether or not an LLC holding a rental property needs a separate bank account.

💡Property Management Company (PMC)

A property management company is a business that manages properties on behalf of owners, typically handling tasks such as collecting rent, maintenance, and tenant relations. In the video, the script describes how a PMC can collect rents and remit them to the property owner, which affects the decision on whether individual LLCs need separate bank accounts.

💡Wyoming Holding LLC

A Wyoming Holding LLC is a specific type of LLC that is often used to hold assets, such as real estate, due to Wyoming's favorable business laws. In the script, the Wyoming Holding LLC is mentioned as a parent company that owns multiple special-purpose LLCs, each holding a rental property, and it is suggested that this holding company definitely needs a bank account.

💡Compartmentalize

To compartmentalize means to divide something into separate parts or categories. In the context of the video, the speaker discusses how some clients choose to create separate bank accounts for each LLC to compartmentalize the income and expenses associated with each property, which can make financial management more organized.

💡Bookkeeping

Bookkeeping is the process of recording and maintaining financial transactions of a business. The script emphasizes the importance of good bookkeeping for an LLC, especially when deciding not to create separate bank accounts for each LLC, as it helps to track and segregate the financial activities of different properties or business units.

💡Owner's Statement

An owner's statement is a financial report that summarizes the income and expenses of a rental property, typically provided by a property manager. In the video, the script explains that an owner's statement along with a wire transfer can be sent from the property manager to the owner's holding company, which is why individual LLC bank accounts may not be necessary.

💡C Corp

A C Corporation is a type of corporation that is taxed separately from its owners, offering limited liability protection. In the video, the speaker suggests setting up a property management entity as a C Corp or a disregarded entity, depending on tax considerations, to handle the management of properties and collect rents from tenants.

💡MSO

MSO stands for Management Service Organization, which is a business entity that provides management services to other organizations, such as medical practices. In the script, the speaker gives an example of an MSO as an active business that would require a bank account to receive payments for its management services.

Highlights

An LLC may or may not need a bank account depending on the type of business and its activities.

Bank accounts are not necessarily needed to legitimize an LLC.

The necessity of a bank account depends on the business activities, such as collecting rents or conducting transactions.

In real estate, having a bank account for each LLC may be optional if property managers handle rent collection.

For real estate investors, it's common to use a Wyoming holding LLC to centralize funds from multiple properties.

Self-managing properties within the state may require individual bank accounts for each LLC.

Property managers can simplify financial management by sending one wire to a central account.

Good bookkeeping is essential when using a centralized account for multiple LLCs.

Separating business income and expenses is crucial to maintaining legal protections of the LLC.

Creating a property management LLC can reduce the need for multiple bank accounts.

Active businesses, like management service organizations, typically need a dedicated bank account.

The decision to open a bank account should consider the business's need to collect and manage funds.

Passive activities may not require separate bank accounts if funds are managed through another entity.

Minimizing the number of bank accounts can reduce administrative burdens and banking fees.

There is no legal precedent that mandates an LLC must have a bank account to avoid piercing the corporate veil.

Transcripts

- Hey, you ever wondered whether or not

your LLC needs a bank account?

Well, in this video,

we're going to be addressing that exact point

when we talk about when a bank account is necessary

for your limited liability company.

All right, let's get started.

Okay, so here's the thing that you talk to

a lot of different people

about setting up bank accounts for LLCs

or you look at videos on the internet,

and they kind of range all over the place

when it comes to determining,

is a bank account necessary for your LLC?

Now, there are those people out there, they'll tell you,

"Yes, in order to have an LLC,

you definitely have to have a bank account

or you do not have a business."

Now, if you take that line of reasoning

to its natural conclusion,

then that would say if I set up a limited liability company

for say, and I put a brokerage account into it

and not a bank account,

then I guess do not have an investing business.

And so what happens many times

when people start talking about bank accounts

and limited liability companies and piercing the veil

of the LLC if you don't have a bank account

because it's not a true business,

is that these individuals may not quite understand

what it takes to pierce a corporate veil,

and what it takes to actually have a business entity

respected by the legal system.

So really, what I see

when it comes to setting up limited liability companies,

what I tell people is like,

hey, it depends on the type of business

and whether or not a bank account

is actually needed for that LLC.

And so I look at bank accounts for LLCs,

not from the standpoint of legitimizing

whatever business enterprise I'm engaging in,

it's more from the standpoint of do you need it

in order to conduct the necessary activity

that you're looking to do through that particular business.

So let me just show you some examples

of what I'm referring to here.

So most of this comes up in the real estate context.

So assume that I have a few LLCs set up like this,

and each of these limited liability companies

have a rental property inside of them.

Now, oftentimes, in the structures

that I create for my clients

and what we do here at Anderson,

we like to have things inside of a Wyoming LLC.

You'll notice from my other videos,

I refer to this blue box as a Wyoming

holding limited liability company.

So each of these real estate special-purpose LLCs

are all owned by that one Wyoming LLC.

Okay, so herein is where we need to determine,

do you need bank accounts for all four of these boxes?

Well, it would depend on how you're running your business.

So in this particular case,

let's assume that this investor right here,

we'll call him Fred,

Fred lives in Texas,

but he invests outside the State of Texas.

So he has an LLC set up here in New Mexico,

he's got another one set up here in Ohio

and this one's set up in Illinois.

So he has three different rentals in various states.

Now, obviously if Fred's living in Texas,

he is not self-managing those properties.

Typically, Fred would be using a PM

in each of the states to handle these individual properties.

So since he's not there, he's not collecting the rents,

and you have a property management company

handling all this for you,

it really gives Fred some latitude in determining

where the rents can be collected for him.

So in this particular case,

a lot of our clients will choose not to create bank accounts

for each of these individual LLCs.

Now, why do they choose not to set up the LLC bank accounts?

Well, because the LLC owns the property,

so it has an investment asset in it,

so it checks the business test.

Yes, it's a legitimate business

because it has an investment asset,

but it doesn't need the bank account because,

the property manager here

is the one that's collecting the funds

and then remitting the owner statement with a wire

every month back to the owner.

So in this case, the way I've actually run my own business,

I'll have the PM issue the owner's statement

and the wire back to the Wyoming holding company.

So this is the company

you definitely need a bank account for.

These up here are going to be optional accounts,

whether or not you want to use 'em.

Some people who choose to set up accounts

up here at this level

will typically do so because it makes it easier for them

to compartmentalize the income and expenses

associated with each property.

But if you're using the technique

that I'm sharing with you right here,

where you're running everything

back to your holding company,

that's going to necessitate

that you have really good books and records,

that you're using bookkeeping services

or you understand this yourself

and you categorize everything in QuickBooks,

because when you receive that owner's statement,

when it comes into your Wyoming holding LLC,

you definitely have to have a set of books

for each of the red boxes,

so you can track all the expenses and all the incomes,

the CapEx and that stuff

that goes into those individual properties.

So, that is important

to have down here at the blue box level,

and so you can have one bank account

and these are just optional.

There's no need to have a specific account for those,

because you're not collecting any activity there.

And the example I've used in the past is,

in certain portfolios

that my partner and I own,

let's say that our PM is managing 40 properties,

that PM would not send us,

four, 10 different wires

on that portfolio.

They're only sending one wire

and one owner's statement on a monthly basis.

So, you say you had 10 LLCs set up

with four separate properties in each,

the property manager's not going to send you the 10 wires.

So they're only sending one wire,

so you couldn't even put the assets

or move the money into those separate accounts,

so it just kind of negates the actual purpose of having

a separate LLC account.

So, in this scenario,

it's an option

whether or not you need to create a bank account

for your red boxes.

So I would tell someone,

hey, yeah, you don't need it.

As long as you have it here,

and remember what I said,

you have good books and records,

you got good bookkeeping to account for the income.

Now let's change the scenario up a bit.

Let's assume instead that these properties

are all in the state in which you reside.

So this gentleman resides in Texas,

so I'm going to set 'em all up as Texas LLCs.

Now, they happen to be in his hometown,

and he is a hands-on property manager.

He's applying for rep status

and he wants to maintain that,

so he's out there working with the tenants.

Now this changes the dynamic.

So in this scenario now,

if you're self-managing properties

and you have 'em in in LLCs like this

and you're doing it in your individual name

as the manager,

going out and working on these houses,

that's where I would recommend you create a bank account

for each limited liability company.

So I definitely would create

one, two, three, four bank accounts,

'cause you're always going to need one at the blue box level.

So when you're thinking about LLCs in the blue box,

you'll always put one there.

The red boxes are the ones that are going to be optional.

So what we could do here, if you're self-managing,

you would have one red box LLC account, definitely required.

Now, why would you do that?

Because you're going to have

the tenants pay the red box directly.

You never want a tenant, note this, all right?

You never want a tenant to pay your blue box.

They will never interact with that blue box,

because that Wyoming LLC is not conducting business

in the state where the property's located.

So it does not collect rent.

That is a major mistake that I've seen made

by real estate investors

who try to set up something like this on their own

and then they have their tenants paying their Wyoming LLC

and they have properties in New York.

You're just creating a potential problem for yourself

down the road.

So, in this scenario then,

you would need one bank account per company.

Now, a way to get around that,

again, if you want to minimize

the number of bank accounts that you're using,

well, obviously consider creating

your own property management entity.

So here's what you could do in this scenario.

So rather than being

the individual property manager yourself,

what you would do is you would set up,

maybe it's an LLC,

I like to set these up as either a C corp

or disregarded entity,

depending on whether or not we're looking to reduce taxes.

If taxes are not a concern for you, disregarded LLC.

I've got videos on this

and I'm going to be cutting another one shortly

on setting up your property management entity.

But anyways, you've set up an LLC,

and then this LLC

is now performing that management function,

so it's the entity dealing with the tenants.

So, Fred is up here as a manager of his LLC.

Now, in this scenario,

the tenants would be paying the LLC directly.

So all the funds are collected at this management level.

Now we're back to that scenario that I started out with,

where you have the out-of-state property manager

and issuing back the one wire on a monthly basis

with the owner's statement.

This is what you're going to do here.

You're going to prepare an owner's statement

and you'll send the money down to your Wyoming blue box.

And again, now we can avoid having separate bank accounts

for each of those red boxes.

But again, going back to the bookkeeping,

remember, you have to have good books and records somewhere,

so if somebody did look at your overall business

and they wanted to challenge it and say,

"Oh, it's just one common business enterprise here,

we're going to ignore the corporate form",

you could show,

no, I keep great books and records

to segregate all of my investments from each other,

and so I am internally tracking that.

So if you're ever approached by say,

an attorney or or someone else,

many times they're not attorneys

and they tell you, "Nope, you can pierce a corporate veil

if you don't have a bank account."

That is not true.

There's not a case out there that I've ever come across

where it said if an LLC doesn't have a bank account,

you could pierce that entity and then go after the owner.

And if somebody tells you that, say,

show me the fact pattern.

And if you ever want to look at the fact pattern, remember,

you have to look at it with that in mind

that the sole reason for piercing it

was because there wasn't a bank account.

And see this is where people sometimes

do not tell you the whole story.

They won't say,

"Oh yeah, but the LLC was also committing fraud

on the general public,

and that's not the reason why they pierced the entity,

it's because they didn't have a bank account."

No, it's because that was just another indication

for the court to throw in there and say,

"Yeah, and we're going to pierce it for this reason as well."

All right, now,

this is in the real estate context.

Now, what happens if we're not in the real estate context,

and instead, I've created a business here?

And let's assume

this business is a management service organization

that I've set up to manage my rent or my medical practices.

So I set up an MSO to manage those,

so now we have an active business that we're dealing with.

So, this company right here

definitely needs to have a bank account set up,

because it's going to be conducting management activities

of these various other enterprises

that are going to be paying it money.

So again, as I originally started off with,

is that if your business is going to be creating

or engaging in some type of activity

where it's receiving funds

for the services that it is providing,

you're going to be setting a bank account up for that.

So generally, overview,

what I would tell you is this,

if it's a passive activity,

then you can just go through an analysis and determine,

do I really need that account

or do I have some other structure or part of my structure

that would allow me to collect those funds?

If the answer to that is yes,

well then maybe you can cut down

on the number of bank accounts that you're setting up,

'cause I get it,

having a ton of bank accounts

can be a little bit of a headache,

plus there's fees many times that come along with that

when you open these accounts up

and you don't maintain minimum balances

with the institution.

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