The importance of separate bank accounts in parent-sub LLC structures

Most sophisticated real estate businesses have a separate limited liability company (“LLC”) title holder for each property in their portfolio. One of the primary drivers for this is the desire to “contain” property level obligations and liabilities to the respective LLC property owner for each property. For example, if a tenant suffers an injury at one property due to the tortious actions of the owner, in theory the tenant could only obtain a judgment against the LLC that owns the property where the tenant suffered the harm.

However, due to administrative difficulties, many real estate businesses route their rents and other funds through a single bank account for each of their LLC title-holders, sometimes in the name of a “common parent” LLC.

Whether the veil of a LLC can be pierced is an evolving question in many jurisdictions, as the popularity of limited liability companies is a relatively new phenomenon. Recent cases in Illinois have given conflicting interpretations on the issue, but at least a few have applied the general corporate law of veil piercing.

The determination of whether a corporate veil should be pierced often hinges on whether the separate personalities of the corporation and the parties who comprise it no longer exist. For this reason, it is widely known that separating business bank accounts from personal bank accounts is critical in order to shield a business owner from liability.

The same logic holds true when an LLC is owned by another LLC. For example, when a creditor of a subsidiary LLC seeks to levy a judgment, the creditor of the subsidiary LLC may seek to pierce the subsidiary’s LLC veil on the theory that the subsidiary LLC is really just the alter-ego of its parent LLC, due to the commingling of funds on the parent LLC level.

If the creditor is successful, all of the assets in the portfolio can be tainted, defeating the purpose of having a separate LLC title holder for each property.

Further, it is important to be aware that most mortgage loan documents contain “separateness” covenants which prohibit commingling of property funds (the breach of which are recourse events under most agency loan documents).

If your corporate structure utilizes bank account sharing you may want to consider whether it is really worth the risk.