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If I start a business (LLC, specifically) and incur some of the startup costs with my own money, how do I account for this in the bookkeeping once the LLC's bank account is up and running?

For instance, on my own personal books, I have an expense account which is labeled "LLC Startup Expenses". When I create the LLC, I want to be able to somehow move the start up expenses to reflect the fact that the LLC had these expenses, not me personally (e.g. zero out the "LLC Startup Expenses" on my own books). What is the best way to go about this?

  • 2
    You should add a tag to specify which country (and possibly which state) you are talking about. – jcaron Apr 3 '17 at 21:20
  • I think we need a little more information. For instance, I have a Single Member LLC in Illinois and I'm taxed like a Sole Proprietor. The legal structure (LLC) and tax structure (Sole Proprietor) are independent of each other. As a Sole Proprietor, I filed a Schedule C to handle the startup costs for my LLC. This process is noted in Tracy Cramer's answer below. – Tim Reddy Apr 4 '17 at 13:33
15

Typically you give a loan to the company from yourself as a private person, and when the company makes money the company pays it back to you. Then the company pays for all the expenses with the money from the loan.

Even if you don't want a business account yet, you can probably ask your bank for a second account (mine in the UK did that without any problems).

7

You don't even need to formally loan the LLC any money. You pay for the setup costs out of pocket, and then once the LLC is formed, you reimburse yourself (just like with an expense report). Essentially you submit an expense report to the LLC for the startup costs, and the LLC pays out a check to you, categorized for the startup expenses.

  • But this doesn't answer OP's question of what accounts to be used. – Liam Apr 3 '17 at 21:15
  • I read the question to be about the OP's "bookkeeping", not the formal business bookkeeping, in that OP was looking at the startup expenses (LLC filing, etc.) and wanting to make sure those ended up as business expenses not personal expenses. As you correctly pointed out, OP and business are different things, so OP should treat the business just like an employer who agreed to reimburse expenses. – Andrew Savikas Apr 3 '17 at 21:52
4

If you are using software like QuickBooks (or even just using spreadsheets or tracking this without software) use two Equity accounts, something like "Capital Contributions" and "Capital Distributions"

When you write a personal check to the company, the money goes into the company's checking account and also increases the Capital Contribution account in accordance with double-entry accounting practices.

When the company has enough retained earnings to pay you back, you use the Capital Distributions equity account and just write yourself a check. You can also make general journal entries every year to zero out or balance your two capital accounts with Retained Earnings, which (I think) is an automatically generated Equity account in QuickBooks.

If this sounds too complex, you could also just use a single "Capital Contributions and Distributions" equity account for your contributions and distributions.

  • So let's say that I have spent $1,000 of my personal money prior to starting the LLC. Could I credit the $1k on my personal expenses and debit an investment in the LLC on my personal books; then the LLC books would have a $1k debit for for startup expenses and an additional $1k credit for capital contributions? – Rich Apr 4 '17 at 20:59
  • It's easier to just submit an expense report to the company and get reimbursed when there's money for it. Then it's a non-event for your personal taxes since you were reimbursed, and the company can expense the startup costs. – Rocky Apr 4 '17 at 21:14
  • What if the startup costs are excessive, and the LLC won't be able to pay it back within a year or two? Would I just expense it on the LLC's books and then create an accounts payable to put the balance and pay it off as the LLC makes the money? – Rich Apr 27 '17 at 13:40
3

How do I account for this in the bookkeeping?

Here is an example below:

enter image description here

This is how you would accurately depict contributions made by an owner for a business. If you would want to remove money from your company, or pay yourself back, this would be called withdrawals. It would be the inverse of the first journal entry with cash on the credit side and withdrawals on the debited side (as it is an expense).


Here is the main point:

You and your business are not the same thing. You are two different entities. This is why you are taxed as two different entities. When you (the owner) make contributions, it is considered to be the cash of the business. From here you will make these expenses against the business and not yourself.

Good luck,

  • That's not necessarily true. As noted in my answer, a single member LLC is just like a sole proprietor business which means all income and expenses are the same for the business and the person. – Tracy Cramer Apr 4 '17 at 2:02
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    @TracyCramer In the US this situation is called a "disregarded entity". The LLC is "disregarded" for tax purposes in that the business transactions show up on a schedule C filed with the owner's tax return. It is still a wholly separate entity legally and for accounting purposes. Your approach will often "work", but in my opinion isn't great for preserving the separateness that distinguishes an LLC from a simple sole prop. (Caveat: I'm a guy with an LLC, not an accountant or bookkeeper.) – rep Apr 4 '17 at 12:48
  • @rep, yes, there is a line between a single member LLC and a sole proprietor business when it comes to finances and it is good to make that line as wide as you can if necessary. – Tracy Cramer Apr 4 '17 at 17:15
1

If you have a single member LLC there is no need to separate expenses in this way since it is simply treated as part of the owner's normal tax returns. This is the way I've been operating.

Owner of Single-Member LLC If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return.

If the owner is an individual, the activities of the LLC will generally be reflected on:

Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship) (PDF)

Form 1040 Schedule E, Supplemental Income or Loss (PDF)

Form 1040 Schedule F, Profit or Loss from Farming (PDF)

An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship. If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner's federal tax return as a division of the corporation or partnership.

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

0

An LLC is a pass-through entity in the USA, so profits and losses flow through to the individual's taxes. Thus an LLC has a separate TIN but the pass-through property greatly simplifies tax filings, as compared to the complicated filings required by C-corps.

protected by Dheer Dec 10 '18 at 5:45

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