Need guidance on how to fund a business and handle income.

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Need guidance on how to fund a business and handle income.

Paul Gilo
Orlando, FL · Member since 2016 · 74 posts · 22 votes

Hey everyone. First post... :)

So I have a question about how to properly handle the bookkeeping and finances in a business. I have a few ppl that are interested in borrowing money from me for real estate purposes, but i want to funnel the interest I get from that money into my business to be able to expense it out or just keep it separate as business income.

So I do have a single member LLC already set up for my software development business. Well, the income is low to none existent, but its there. I set it up with the hopes of doing a bunch of c2c work, but that never panned out... so its there and I will be filing 2nd year taxes on it.

I have had a couple ppl approach me to borrow money. Both good old time friends.

1. Bought a house and got into a deal with a hard money lender, due to lack of credit history. Now hes offering me 9% on my money, since hes paying more than that. 

2. The guy flips house. Buys them off the auctions, fixes, and sells for profit. Hes really doing me a favor by offering me the opportunity to get in and make 10% on my money.

So with that being said. Lets say I lend 100k of my personal money, and this money pays 10% a year. Can somehow funnel this money through my LLC so that the interest earned becomes company income and and the principal comes back to me?

Can someone provide some guidance on how this should be handled?

And I dont have an accountant or a lawyer to handle this for me. I guess thats why I'm here :)

Thank you!!!

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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
Originally posted by @Paul Gilo:

@Justin R.

Appreciate your time and input. 

Access to a CPA is a bit more involved than communication on the forums, so thats why I posted it here. Just trying to wrap my mind around how to best approach these situations. 

Thanks again.

 Totally.  At least you'll know the right questions to ask.  Happy to answer any other Q's that come up!

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  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    ... alternatively if I take the 100k and make a real estate investment. I would want to do it through my LLC, I would imagine. So how do I fund the business with my money and then get it back into my personal account?

    Thanks.

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  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    did i post in the wrong forum? 

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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y
    Paul Gilo You're not going to like the answer. :) You've got an LLC, which means all income and expenses pass through to you personally. It's basically irrelevant for tax purposes in this case. Furthermore, interest income on loans you make are considered regular income, so you get to pay regular taxes on those. Of course, any losses you can show from your business can be used to offset that regular income ... But that would require you to, you know, lose money somehow. These lines are gray. Maybe your business needs a shiny new $2000 laptop. That expense can offset some of your interest income. You get the point. Depends on how far you want to weigh into the fray zone. Many investors (those who make less than $100k per year) purchase rental property, show a paper loss, and use up to $25k per year to offset interest income like you're describing here. At least that kicks the bill down the road a ways.
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  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    @Justin R.

    Appreciate the response... even if I may not like it. :) 

    But this is actually kind of how I saw it. Lets say that I let someone borrow 20k @ 10%, basically at the end of the year I show an income of 2k. And lets say my business does need a 1000 dollar laptop. So now I would be getting taxes on 1000 dollars, instead of the 2000 that the business actually made, correct?

    But I guess the real question is, where/how does the business come to possess the 20k to lend? Am I lending it to the business and the business lends it to someone that will pay interest on it? So then the business had earned income via interest, as its also paying its loan to me over time? Does that make sense, or am I being too creative for IRS? :)

    I am also looking to purchase an investment property and I want to put it under the business so that I can have protection for my personal assess and be able to deduct any expenses to reduce my overall taxable income. 

    So lets say the property is 100k. How does the business get those funds? I'm thinking bout buying with cash to get the best deal and quickest closing. And then go to the bank and get a loan on the property to pull my money out.

    So lets say I can get a 100k property for 80k, I can get the 80k I originally invested into the business to buy the property. After that any income and expenses will just need to be tracked in the business. Obviously at the end of the year, my NOI is 10k, I understand that that would roll down to me and i would have to pay taxes on that. I'm OK with that.

    I really appreciate your time. Just trying to wrap my head around this process of how to fund and then separate my personal and business money and be able to expense out some stuff to ultimately save money on taxes.

    Thanks again!

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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Paul Gilo You're on the right track with everything you're saying.  In your accounting for your business, you can transfer money from your personal bank account to the business bank account at any time - this is called an "Owner Contribution."  Once that money is in the business bank account, buy the property for cash.  Done.

    By keeping these books separate, you are declaring what is an asset for the business, and what any creditor can come after.  The idea is that you find the business adequately and consistently treat it as a separate entity, and so long as that's true, it provides you limited personal liability.

    When it comes time to file your taxes, the IRS says "I don't care about any of that legality mumbo jumbo. You own the company, you control everything, so the company is the same thing as you personally." Literally, your taxes will look the same whether you have that LLC or not. The $1000 computer can be considered an expense regardless of whether you have the LLC ... Though it's more clear what's going on since you have the business registered.

    One challenge in all this is when you "go to the bank to get a loan." That loan will be in the name of the LLC, which means you won't get attractive personal mortgage rates. That can be a big downside.

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  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    @Justin R.

    I assume that this Owner Contribution can be pulled back out of the business at any time, such as a point when I can take a mortgage out on the investment property, to pull my initial investment out?

    My understanding that when your buy it through the business and "for the business" then this can be filed as a business expense and therefore lowers your taxable income. If I just have a job, I dont think I'm able to do that. 

    In regard to getting a bank loan and all the rates associated with that, I will have to look into that. But what is the alternative? Would you buy 4, 8, 12 unit property and keep it under your name? Seems like that could potentially give you more worries. And then there is the whole writing off the expenses thing. 

    Appreciate the input and guidance.

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  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
    10y
    You really need a good CPA. My guess is that he or she can sort this out for you in an hour or less. Good luck.
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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Paul Gilo Yes, you can pull out capital at any time - it's called an "Owners Draw" - but the idea is generally that you capitalize the business, then let the business use that capital to make money.  This makes it clear in words and actions that the entities are separate.

    You can start a business called "Paul's Murals" and write off as an expense everything you have to buy to run that business. You don't need an LLC for that. You just report your income and expenses related to the business on Schedule C and pay your taxes as calculated. Real estate is the same thing ... It's just reported on Schedule E. Doesn't matter whether you hold it in your own name or the name of the single member LLC.

    We can help more, but @Al Wilson is right - a CPA could explain in detail and is more trustworthy (hopefully) that some random schmucks on the Internet.  ;)

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  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    @Justin R.

    Appreciate your time and input. 

    Access to a CPA is a bit more involved than communication on the forums, so thats why I posted it here. Just trying to wrap my mind around how to best approach these situations. 

    Thanks again.

    0Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Paul Gilo:

    @Justin R.

    Appreciate your time and input. 

    Access to a CPA is a bit more involved than communication on the forums, so thats why I posted it here. Just trying to wrap my mind around how to best approach these situations. 

    Thanks again.

     Totally.  At least you'll know the right questions to ask.  Happy to answer any other Q's that come up!

    1Reply
  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    @Justin R.

    Your a good man. Thank you :)

    1Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Paul Gilo:

    @Justin R.

    In regard to getting a bank loan and all the rates associated with that, I will have to look into that. But what is the alternative? Would you buy 4, 8, 12 unit property and keep it under your name? Seems like that could potentially give you more worries. And then there is the whole writing off the expenses thing. 

    Appreciate the input and guidance.

    Forgot to answer that part. If you're buying a 5+ unit property, you don't have any choice - you're going to get a commercial loan. If you're buying a duplex for long-term hold, you'll get better terms if you buy as an individual rather than as the LLC. It's up to you to decide whether the additional expense to holding the property in the LLC is worth the liability protection value it provides. Rational minds can disagree on this. Much digital ink spilled on this topic in other threads, so no need to go into that here.

    1Reply
  • Paul Gilo
    OP
    Orlando, FL · Member since 2016 · 74 posts · 22 votes
    10y

    gotcha. thanks!

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