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by LiNeXT
1713 days ago
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> Because yes, it does sound pretty ridiculous that an LLC needs to maintain a $0 balance or else it will penalize the owners of said LLC. That doesn't sound right. It's definitely not correct at all. Neither is issuing phantom invoices to yourself to put money into the account. A bank account is just a vehicle to store business cash, it really has nothing directly to do with the way you should be maintaining your LLC's books. You should be recording things like that as "capital contributions" which increase your "capital account." Similarly, profits and losses should be booked to your capital account. I would strongly recommend doing some reading on capital account bookkeeping. |
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I may have given the wrong impression, but to be clear I certainly wasn't recommending using Mercury as your tax accounting software! I was saying that as long as income flows into your LLC's bank account, and out into your personal account, and that you never use your business account for personal expenses, then you have nothing to worry about.
I really appreciate the reference on capital accounts; not knowing how to classify inbound transfers from my personal account was bothering me. That still raises the question of whether there is a tax, and how much the tax is. Are you saying there's no income tax when you transfer your personal funds into an LLC, since capital contributions aren't income?
After pausing and searching for the answer to my own question, https://howtostartanllc.com/form-an-llc/contributions-and-di... -- the answer is probably "no, not even slightly" and also "this is suddenly quite complicated."
https://www.legalzoom.com/articles/how-to-add-capital-contri... seems slightly less complicated:
> If you plan to contribute property, you will need to obtain a market valuation to determine the value of the property you are contributing to the LLC. Capital contributions in the form of property may also attract a number of potential tax consequences, so it's generally a good idea to consult with a tax advisor beforehand.
> You also can make a capital contribution in the form of services. As with property, you will need to obtain a market value for the value of your services. There also are tax consequences, as you will have to treat this value as if it were actual income you earned for your services, meaning you will have to pay personal income taxes on the value of these services. Because of this, services are not as popular a form of capital contribution.
So, yes, you can "invoice for services rendered" (aka services capital contribution, apparently) but it'll be taxed as income. Therefore, you want to contribute property, and the tax consequences are left as an exercise to the reader.
Looks like I'll be completing that exercise, but perhaps not at 2:30am.
Cheers for the tips.
EDIT: Two more useful resources:
- https://www.law.cornell.edu/wex/contribution
> The capital contribution increases the owner or partner's equity interest in the entity. Capital contributions are not considered business income unless given in the form of a loan.
- https://ttlc.intuit.com/community/business-taxes/discussion/...
> For a Single Member LLC (that has not made an election to be taxed as a corporation), the IRS does not recognize the LLC exists (for most purposes). Therefore, you and the LLC are the same. Therefore, there really isn't such thing a Capital Contribution for tax purposes.
Apparently "It's complicated(TM)" is still the final answer, because single member LLCs can't have Capital Contributions. Hmm.
One reason I post openly about this sort of thing is precisely because people like yourself come out and correct my misunderstandings. So again, thank you! This is certainly a reminder that I have lots more reading to do.