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So I’ve read in a number of forums—mostly StackExchange and Reddit—that it’s a good idea to separate personal and business funds/transactions so that when it’s time to organize information for taxes (or a self-audit), the both are clearly distinguishable. It’s even more important if I plan to create a limited liability corporation (LLC). I plan to add some self-employment income to supplement my W-2 job, starting as a sole proprietor and then moving to a LLC once I’ve got the hang of it. I’m not sure if I’ve got the bootstrap process right and whether some minute details of the process may come back to bite me later if I screw it up (see questions at bottom).

From the information I’ve gathered online, this is how I conceptualize the process of starting a LLC:

  1. Create the LLC. (The costs will be paid out of personal funds.)

    1. Decide on a name. Make sure it is available as a domain name and purchase it right away using a registrar that offers privacy. (I wouldn’t want my home address in the registry.)
    2. Choose a registered agent. (A commercial service would be a good choice reasons of privacy, because I don’t want to expose my home address and cannot use a post office box address. They could also complete the rest of the paperwork needed to form a LLC on my behalf.)
    3. File articles of organization.
    4. Create an operating agreement.
    5. Get an employer identification number (EIN).
  2. Open a business checking account (and possibly a business credit card).

  3. Fund the business and properly account for it. This is probably one of the most important bootstrapping actions, as separation from personal transactions and adequate capitalization such that the business is viable on its own can determine whether the LLC’s corporate veil can be pierced in the case of a legal dispute.

    • Fund the business by transferring my personal funds using a check (or an equivalent mechanism that can be audited). The capital contribution will build my equity in the LLC. Multiple transfers may be made early on when the business is not expected to be self-sufficient, but they will increase my own liability if the LLC gets into trouble.
    • Fund the business by creating a promissory note from me to the LLC, specifying the repayment terms. This doesn’t build equity. The interest I charge to the LLC will also be taxable. For the LLC, it’ll be an expense.
  4. Put up a website. Do business. Pay for expenses and collect revenue.

  5. Pay myself periodically by transferring business funds into my personal account. The funds are already taxed, so it doesn’t make a difference. But frequent transfers may draw unwanted attention from the IRS.

At tax time, I would have the LLC treated as a “disregarded entity,” which means I fill out Form 1040 Schedules C, E, and F, and file as part of my personal taxes.

So I’ve outlined the process above but I’m not 100% certain that I’ve got it all right. I can certainly enlist the services of a company to do the creation of the LLC for me. But afterwards, there’ll be a few minute details:

  • The capital contribution (filing fees, cost of mailing, etc.) I put into creating the LLC… is that considered equity in the LLC and does that go into the ledger in any way? Or is it a sunk cost with no means of recovery (not even as tax deductions)? A similar question did not get a clear answer other than “talk to a professional.”
  • The domain name I purchase before creating my LLC… do I hold on to it under my name or transfer/sell it to the LLC? Holding onto the domain name under my own name would be commingling, no?
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    When you say self-employment income, what are you doing exactly? Is this just on the side consulting work, or is this selling things on eBay, or what? – Joe Feb 3 at 6:08
  • RedBubble: I “license” my design to the company and they take care of producing products and selling them, paying me a royalty for each sale; Respondent.io: I complete surveys, partake in research, and join in focus groups for a small payment; and making apps for mobile devices… will either be advertisement revenue or income from selling the apps themselves. – Kevin Li Feb 3 at 20:48
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    None of that sounds really like all that much money; is it really worth doing all of this work to separate your finances for these? How much money are we talking about? $5-$10k annual? Do you have meaningful expenses for any of these activities? – Joe Feb 3 at 20:52
  • You’re right. They are not significant sources of income. Other people I have consulted reported a measly $50 over a year from RedBubble. But at the same time, I’d rather not have the IRS hit me with “negative income” (read: fines) for shoddy accounting of expenses or improper business expense deductions. I like to play things safe, if you get my drift. I do understand that an LLC may be overkill for a tiny enterprise though. Maybe if I can have one LLC operating multiple types of future businesses I haven’t conceived yet, I can amortize the cost of creating one. – Kevin Li Feb 3 at 23:09
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    There's no reason to worry about the IRS here. This would all be pass-through income anyway, so the taxes are identical whether you have a separate corporation or just report it as personal income. Just report it as self-employment income. Making an LLC/S-Corp/etc. and having bank accounts etc. is for when you have a business with significant expenses of its own, not for your $50 a year side gig. – Joe Feb 4 at 4:16

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