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I own a side company creating web apps. I formed an LLC, registered an EIN and opened a business checking account. Recently, I sold a copy of my software for let's say $10,000. Now, since everything gets passed through to me personally, how do I go about "using" these funds for personal things like buying a home or buying a new TV?

I figure, from the IRS standpoint, they just want me to show profit/loss. As long as I keep track of this, they don't care what i do with my revenue, correct? I guess the question is, how do I show (do i?) that my business account has $10,000 but I transferred over $3,000 into my personal account in order to spend it?

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up vote 2 down vote accepted

Basically, yes. Don't use your business account for personal spending because it may invalidate your limited liability protection. Transfer a chunk of money to your personal account, write it down in your books as "distribution" (or something similar), and use it in whatever way you want from your personal account.

The IRS doesn't care per se, but mixing personal and business expenses will cause troubles if you're audited because you'll have problems distinguishing one from another.

You should be using some accounting software to make sure you track your expenses and distributions correctly. It will make it easier for you to prepare reports for yourself and your tax preparer, and also track distributions and expenses. I suggest GnuCash, I find it highly effective for a small business with not so many transactions (if you have a lot of transactions, then maybe QuickBooks would be more appropriate).

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Thanks, I'm in the process of evaluating different software. More than likely I'm going to have an accountant prepare my returns since my wife and I will be filing jointly and we'll be buying our first home in a few months. – luckytaxi Apr 28 '12 at 11:28
Let's say I "write off" things such as fax services or server hosting, as long as I have money to cover them in my business account I should be ok. However, let's say I need to dip into my personal fund? I transfer money into my business from my personal so how is that categorize? – luckytaxi Apr 28 '12 at 11:29
@luckytaxi you can either loan money to your business or add to basis (add to owner's funds), and that's fine. However, if your business is just for writing off expenses (i.e.: you report losses on your schedule C), your business might get re-categorized by IRS to a hobby and the losses disallowed. – littleadv Apr 28 '12 at 19:58

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