All Forum Posts by: Nathan Oberle

The LLC is really a separate issue from your accounting problems. LLCs are established by state statute, so for Federal taxes a single-member LLC is treated the same as a sole-proprietorship for tax purposes, unless the LLC elects S-corp status. An S-corp election could potentially save you money to the extent that some of your income is a return on capital and not due to your actual labor.

If you go down that road you'll definitely need different bank accounts. Your personal accounts need to be kept absolutely separate from your business accounts if you establish and want to maintain a separate legal entity for your business. For making transfers back and forth between your personal and business accounts those will need to be tracked to determine what portion is capital contributions and what is wages or distributions or return of capital. 

If you keep the current system where you ARE your business, there's no need for separate/business accounts but either way you'll definitely need to keep better records.

Having a connection with a local banker can be very valuable. We were able to tap into some gov't-backed low interest loans because our banker knew we were thinking about some construction projects around the same time he was sitting on excess funds. Big banks didn't seem to want our business. 

Next step, I'd say find a good accountant. 

Single-member LLCs by default are disregarded entities, meaning the income is going to pass-through to your personal tax returns as if you were a sole proprietor. You could establish an S-corp to save some money on self-employment taxes, but it's a pass-through as well. You could establish a C corp but then you've got way more compliance issues and double taxation. With the new tax reform section 199A might be an option for you, but it's too new to try to take advantage of DIY. 

That's good advice, Rachel. Long story short, we had a similar situation with the family business. Found a business with a lot of upside potential but seller wanted way more than what was reasonable. Unfortunately he developed health problems a few years later and we were able to buy for a fair price. 

OK, I think I'm following you now. I'm curious what kinds of start-ups costs you've seen with this type of business that can't deducted if you're a disregarded entity? 

@Ashish Acharya That's interesting, I thought Sec 195 applied to all taxpayers, including disregarded entities. I thought Regs. Sec. 1.263(a)-5(a)(6) required disregarded entities to capitalize start up costs if they exceed de minimis ($5k). I thought those revenue rulings you mentioned were superseded by more recent Treasury regulations (TD 9107). 

To follow up with some of the good advice @Lance Lvovsky gave above, certain costs are capitalized and depreciated while others can be expensed in the current period. If you're not accurately tracking these things it's going to be a nightmare for your accountant when you sell the property and they have to try to figure out what your basis in the property is. 

An LLC is established by state statute, for federal taxes you'll be treated as a disregarded entity (if you're the sole member) or if you have multiple members you'd be treated as a partnership, or you can elect S or C corp treatment.

What is your cousin bringing to the table? If it's just money, maybe it'd make more sense to structure his part as a loan? You'll definitely need a good operating agreement. Partnership taxation can be very simple but can also get very complicated very fast, especially when you get into substantial economic effect issues. Calculating basis gets tricky too especially with combinations of sweat equity and cash infusions. 

The long and short of it is I'd pay a CPA to do it right upfront. 

It sounds like you are planning on having two separate entities? That doesn't seem necessary. Also you can elect S-corp status at a later date if/when it does become advantageous. Starting an S corp now will just increase your administrative burden and tax prep fees. 

Thanks for the advice so far! Cara, I can't call myself a CPA just yet but hopefully by summer I'll be done with all the exams.