LLC and mingling
Mahesh
I formed an LLC for my rental business. It took me 2 months to get my
LLC bank account setup (due to multiple reasons). So the first rent
checks I received went into my personal account.
Also I incurred expenses repairing the rental units I acquired. These
expenses came out of my personal account.
Now that my LLC bank account is set up, how can I rectify the mixing
of funds?
One step I have taken is to write a personal check to my LLC
for the rents that went into my personal account.
However, my LLC account does not have the funds to pay me for all the
repair costs.
And what about the capital costs of buying the rental. This was bought
under my name (with personal funds) and then transferred to the LLC
using a "quit claim deed".
What steps do I need to to take so I won't be guilty of "piercing the
LLC veil". Thanks.
Barry Gold
[OP formed an LLC for his rental business, and used his own personal
funds to get the business started. He also deposited the rent checks
into his personal account until he (finally) got his LLC bank account
set up. The LLC does not have the funds to pay for his initial
repairs, even after transferring the rent receipts to the LLC's
account.]
>What steps do I need to to take so I won't be guilty of "piercing the
>LLC veil". Thanks.
This is for discussion purposes only, and is not legal advice. I'm
not a lawyer. If you want legal advice, hire a lawyer.
Actually, "piercing the veil" is what a _court_ would do, if somebody
sued the LLC and convinced the court to do so. When will a court do
so? When you fail to treat the LLC as a separate entity, mixing your
assets with the assets of the LLC -- as you have done.
You can find details on this in Wikipedia:
http://en.wikipedia.org/wiki/Piercing_the_corporate_veil
For this reason, you should find a real lawyer who specializes in LLC
& small business corporate law, and ask _him_ to help you straighten
out the mess you have created. Anybody who is in business (other than
part-time sales or such) should have a lawyer for their business
anyway.
That said, here's a _general_ summary of what should be done:
1. You bought the rental property and quitclaimed it to the LLC. You
also spent your own money to do repairs on the property. You should
execute a _written_ loan agreement between yourself and the LLC for
the money you spent to buy and fix up the property. It should specify
repayment terms and interest to be paid.
2. You have already transferred the rents from your personal account
to the LLC account. YOu should make a record of this transfer on the
books of the LLC. And you should _keep_ books for the LLC. THis
doesn't have to be anything fancy. A journal of expenses and receipts
and a periodic summation of the assets and liabilities of the LLC
should do. But note that there is inexpensive "general ledger" software
out there. I would recommend you get one and use it.
3. You should be paid for your work running the LLC. This can be a
salary or a share of the profits. In either case, it should be
formalized as a contract between you and the LLC. If the LLC cannot
currently pay you a salary, you can lend it the money -- at interest
and (again) with specified repayment terms. Or perhaps simply let the
salary accumulate as an unpaid debt of the LLC. Your LLC's lawyer will
know which course is better. This is a good idea anyway, because it
helps you figure out whether your business is viable. Frex, if you
have "lent" your salary to the LLC for 3 years and it still isn't able
to pay you back, the chances are you should get out of this business.
Paying yourself a salary has another benefit. Let's say that you do
this for two years. It looks like things are going well, but then
there's a crash in the rental market in your area. Half of your units
sit empty. The expenses continue and the rent income isn't enough to
cover them. So you fold the business, filing bankruptcy for the LLC.
But you have had work done on the building, and some of the
contractors haven't been paid, plus you have (perhaps) tax and other
debts from your business. If you don't pay yourself a salary, the
creditors take all the money in the LLC's bank account, plus whatever
can be had by selling the building(s). If you have set yourself up as
a salaried employee, _you_ are also a creditor. That means you will
get a proportionate share of the assets. Better yet, if you have
unpaid salary, that is a higher priority debt than almost anything
else (except taxes). So you would get "first call" on the remaining
assets -- to the extent of your unpaid salary.
4. From now on, be careful to keep your assets and those of the LLC
separate. When you reach the point where you can take money from the
LLC for your own use, show that on the LLC's books as either a salary,
"profit sharing", or a dividend, depending on how things are set up.
Again, get a real lawyer and pay him to straighten this out and get
you on a proper business footing. It will be the best few thousand
you ever spent.
Your best bet is to ask your personal attorney -- the one who handles
routine matters like wills -- to recommend a specialist in
small business LLCs. If you don't have a personal attorney, ask your friends,
relatives, and co-workers to ask their attorney for such a
recommendation. If several come back with the same name, call that
one first.
If all else fails, ask your county Bar Association for their referral
list, or look in the yellow pages. But a referral from somebody you
trust is better than relying on a YP ad, and the Bar Association just
lists every lawyer who _says_ he/she works in that speciality. Do
*not* hire a lawyer based on an ad you saw in TV, the newspaper, a
bus bench, or the Internet.
Call up and ask for an appointment. Ask how much he willcharge
for the initial consulation.
--
Barry Gold, webmaster:
Conchord: http://www.conchord.org
Los Angeles Science Fantasy Society, Inc.: http://www.lasfsinc.org