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:
Create the LLC. (The costs will be paid out of personal funds.)
- 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.)
- 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.)
- File articles of organization.
- Create an operating agreement.
- Get an employer identification number (EIN).
Open a business checking account (and possibly a business credit card).
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.
Put up a website. Do business. Pay for expenses and collect revenue.
- 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?