Investor · Buffalo, NY · Member since 2013 · 100 posts · 15 votes
After flipping a few properties and acquiring some buy and holds on my own I opted to start a LLC. However the LLC currently has no funds in the account and the bank told me that if I was to transfer any of my own money into the account the IRS would view that as "income". I could how ever "loan" my money to my LLC then pay it back to myself. So my question would be what would be needed to do something like this? Has anyone done this themselves, and if so how did you do it for tax purposes? Is it just as simple as making a note on a piece of paper with the amount loaned, any interest if added in there, and sticking into the recorder?
that's not true! Don't take accounting advice from a banker, it's called a "contribution of capital" and is not taxable, you can put 100 million in your LLC this year, to fund a future skyscraper next year, you don't pay tax on the 100 million, you only pay tax on any profits. now it is true if you ever audited and you don't keep good records of the money you personally put in your company irs might assume all deposits are revenue (sales or rents).
Create a proper promissory note from you to your LLC. Make sure you specify all the repayment terms. You must charge your LLC interest on the loan. That interest will be taxable to you when you receive it but it will be an expense to the LLC. Repayment of the principal will not be taxable. Check with your accountant or attorney to see if there is anything in the structure of your LLC or your finances that you should take into consideration.
There are pre-paid legal services available which allow you to consult with attorneys without the meter running. Send me a PM and I'll be happy to share the one I use.
that's not true! Don't take accounting advice from a banker, it's called a "contribution of capital" and is not taxable, you can put 100 million in your LLC this year, to fund a future skyscraper next year, you don't pay tax on the 100 million, you only pay tax on any profits. now it is true if you ever audited and you don't keep good records of the money you personally put in your company irs might assume all deposits are revenue (sales or rents).
oh by the way I am an accountant and I've taught accounting for gulf coast state college so you can take my accounting advice. Hope this helps good luck!
only problem with the cove is they are older so more repairs and maintenance and insurance can be 3 to 4 times that of a home built after 2006, I usually build new construction these days because of that. Message me or email me next time your this way I can show you around.
Yes this is true, I had a property under contract over on Harris and the insurance was higher due to the flood map. I just love those older homes out that way though. I might have drop you a line next time I am down there. I come down to PCB quite a bit since my grandparents moved down there. That why I started looking down there first. Dont know how the market has changed down there since 2013 to now. I still look down there from time to time, I like the whole panhandle area a lot.
@Cameron Skinner is absolutely correct. It's the same as if you moved money from your checking account to another of your checking accounts. Putting capital into your LLC does nothing as far as taxes are concerned because it is pass through (unless you changed the way your LLC is taxed, in which case you wouldn't be asking this question).
Your banker should focus on banking and let accountants and CPAs focus on advising people about what's considered income and what isn't.
@Cameron Skinner is correct. You can contribute as much capital to your LLC as it needs to get going and it's not income. When the LLC is up and running and generating its own cash flow, you can take that money (plus some) back out as a capital withdrawal.
There are some advanced issues involved with continual funding of a company that isn't generating its own funds, the total overall amount that has been contributed as capital and the theory of "going concern" involved in this, but for a basic LLC that's just starting out that's expected to get up and going soon, contributions to capital are just fine.
Keep in mind, your liability in your LLC increases if you simply put your money into the LLC. I prefer to loan my money to my LLCs so that I can take money out without it being taxed as a distribution. Talk to your tax attorney.
Keep in mind, your liability in your LLC increases if you simply put your money into the LLC. I prefer to loan my money to my LLCs so that I can take money out without it being taxed as a distribution. Talk to your tax attorney.
Did you elect to have your LLC taxed as an S-Corp?
@Doug W. I have at least one that is taxed as an S-corp, others that are regular flow through LLC sole proprietorships. Which is why I suggest that people consult their professional support (attorney, accountant, etc). Just because somebody on the internet is doing something, it may not work for others.
Personally, I am a big believer in keeping records, and treating every transaction between myself and my LLCs as if I were an outsider. It works for me, and according to my lawyer keeps my risks lower.
@Jeff Rabinowitz Thank you. I will ask the CPA first, shes free to call, the attorney charges by the hour.
Hi Chris, attorney in Winchester here. I'd be happy to sit down with you to talk shop sometime. The other advice you are receiving is pretty good, but it may be wise to talk all the facts through with an atty.
This has been a great topic. My business partner and I have started our LLC, but all of the funds that we have contributed thus far have been out of our own accounts. No banking account set up for the LLC, yet. We will, obviously, need to consult with our CPA about how to get paid back appropriately and legally so that we pay as little in taxes (or none) as possible on those "start up" costs. At this point we are keeping track of everything in quick books.
If any more experienced investors see anything financially dangerous with this, I am open to all feedback.
Your banker should focus on banking and let accountants and CPAs focus on advising people about what's considered income and what isn't.
@Cameron Skinner is correct. You can contribute as much capital to your LLC as it needs to get going and it's not income. When the LLC is up and running and generating its own cash flow, you can take that money (plus some) back out as a capital withdrawal.
There are some advanced issues involved with continual funding of a company that isn't generating its own funds, the total overall amount that has been contributed as capital and the theory of "going concern" involved in this, but for a basic LLC that's just starting out that's expected to get up and going soon, contributions to capital are just fine.
In the aspect of contributing to your own LLC what would be considered as continual funding? A year or more/less?
Keep in mind, your liability in your LLC increases if you simply put your money into the LLC. I prefer to loan my money to my LLCs so that I can take money out without it being taxed as a distribution. Talk to your tax attorney.
Todd,
Is this done on the same basis as Jeff suggested as a promissory note with the percentage on top when you pay yourself back?
@Todd Campbell A distribution will not be taxed as LLC's and S-corps are pass through entities. Perhaps you are getting confused with a C-Corp? The only time a distribution is taxed is if you distribute more than your basis in the entity. It's then taxed as a capital gain, excess above zero basis.
@Laureen Youngblood Yes your strategy is dangerous. A big reason lawyers are able to "pierce the corporate veil" is that the entity's owners are not treated the entity appropriately. An LLC needs to have it's own bank account, contracts, credit/debit cards, needs to be appropriately capitalized, and should not pay for personal expenses nor distribute to the partners more than ~1x per month. Speak with a CPA :)
Your banker should focus on banking and let accountants and CPAs focus on advising people about what's considered income and what isn't.
@Cameron Skinner is correct. You can contribute as much capital to your LLC as it needs to get going and it's not income. When the LLC is up and running and generating its own cash flow, you can take that money (plus some) back out as a capital withdrawal.
There are some advanced issues involved with continual funding of a company that isn't generating its own funds, the total overall amount that has been contributed as capital and the theory of "going concern" involved in this, but for a basic LLC that's just starting out that's expected to get up and going soon, contributions to capital are just fine.
In the aspect of contributing to your own LLC what would be considered as continual funding? A year or more/less?
I think Linda is talking about say I guy likes to collect cars so he starts a "car museums" as a "business" so he can write off what is really his hobby, he continues to contribute capital to his "business" and writes off his expenses years after year. Some times called the "hobby loss rules" a favorite of irs to target is horse racing and farms. As long as it's a bonafide business interest with a profit motive your fine.
I have some LLCs that negative cash flow because because they are on a 10 year loan, so I contribute capital to them every few months for years. My construction company sometimes has too much going on so I can't make all my bills with the cash in its accounts, so I have to fund it, all this perfectly normal and expected in small closely held companies. Good luck,
Keep in mind, your liability in your LLC increases if you simply put your money into the LLC. I prefer to loan my money to my LLCs so that I can take money out without it being taxed as a distribution. Talk to your tax attorney.
Pulling money out of an LLC as a distribution is not taxed. LLC profits are taxed the year they are earned and are passed through to the members whether they are withdrawn or not. This is true regardless of partnership or S-corp status. The only entity where distributions are taxed separately is in a C-Corp.
This has been a great topic. My business partner and I have started our LLC, but all of the funds that we have contributed thus far have been out of our own accounts. No banking account set up for the LLC, yet.
This is precisely what is discussed when people advise against co-mingling business and personal funds. What's keeping you from opening an LLC checking account?
Your banker should focus on banking and let accountants and CPAs focus on advising people about what's considered income and what isn't.
@Cameron Skinner is correct. You can contribute as much capital to your LLC as it needs to get going and it's not income. When the LLC is up and running and generating its own cash flow, you can take that money (plus some) back out as a capital withdrawal.
There are some advanced issues involved with continual funding of a company that isn't generating its own funds, the total overall amount that has been contributed as capital and the theory of "going concern" involved in this, but for a basic LLC that's just starting out that's expected to get up and going soon, contributions to capital are just fine.
In the aspect of contributing to your own LLC what would be considered as continual funding? A year or more/less?
There are no hard and fast rules for this. As with most things, the IRS would look at the overall picture of an entity, the members and the full history, present and prospective future of the organization.
However, an entity that is not a going concern and which is not meeting requirements for being a business, despite an attempt to make it appear so, can be deemed a hobby.
that's not true! Don't take accounting advice from a banker, it's called a "contribution of capital" and is not taxable, you can put 100 million in your LLC this year, to fund a future skyscraper next year, you don't pay tax on the 100 million, you only pay tax on any profits. now it is true if you ever audited and you don't keep good records of the money you personally put in your company irs might assume all deposits are revenue (sales or rents).
Great Advice here, your banker doesn't know what he's talking about. I make capital contribution to my LLC all the time. There's no need to make it a loan.