LLCs and Money
Keeping proper books for your company is paramount to not only a successful business but also for legal protection. Whether you are being audited by the IRS or being sues, well-kept accounts is one of the most important aspects of running your business. As most of Breglio Law Office’s clients have LLCs, the discussion below is tailored to them. However, the general points are applicable to all types of businesses.
TRANSFERRING MONEY: The first thing you should remember when putting money in or taking money out of a business is WHO is the owner. The second thing to remember is to JUMP through the right hoops. And the final thing is to keep a detailed RECORD of the transaction.
Putting Money In. When you, as an owner, want to put money in a business, it’s typically called a contribution. This is a way of funding, or making an investment, in your company to pay for start up costs, purchasing equipment or property, maintenance and etc. You, or any third party (like a non-owner or a bank), can also make a loan to the company if you draft the right loan documents. They method you choose, a contribution or loan, will depend on how you want to fund the company, where/who the money is coming from and possibly tax considerations. If you want borrow the money, please consult an attorney first to make sure you have the proper documents. But if you just want to make a contribution, you can do that yourself so that’s what we will focus on here.
The contribution is the standard way of putting money into a business. You can do so at any time and for any legitimate business reason. Usually, you don’t need to have an official meeting to make this decision (unless your operating agreement stipulates). You can make a decision, put a note of it in your company records and transfer the money to the business bank account. But here, you need to pay attention. Remember our three points above. First, an “owner” must make the contribution. This isn’t always as easy as it sounds. The owners are the persons or entities named as owners on company documents. Many people “own” a company by way of “another” entity. This is the case if you have a holding company or a trust that owns the company you want to put money into. If you have a holding company, then the holding company has to make the contribution. If you need to fund your holding company first, then you must contribute to the holding company, then it contributes to the final company. This is what we mean when we say you must “jump” through the right hoops! If you skip the “hoop” and put your personal money directly into a company that is owned by another entity, you’ve comingled funds and could lose your protection!
So, as long as you know who the actual owners are, jump through the right hoops and keep a record, you’ll be fine. If you have multiple layers for your business, please ask us to create a diagram to help you remember. We’re glad to do this for you.
Taking Money Out. There are two main way of taking money out of a company as an owner: Salary or Draw. A salary is just that, a wage you pay yourself. This can be done as an employee where you deduct taxes or as a contractor where you don’t. For LLCs you don’t have to pay someone according to their percentage ownership. One person can own 10% but receive a wage when the 90% owner doesn’t. This can also be used as a way to adjust allocating money among the owners rather than by sharing ratios. There are tax implications so please discuss with us or your accountant. A draw is when the owners simply take money out as a profit for being an owner of the company.
When you pay one of the owners (or anyone for that matter) a salary, make sure you have the appropriate employment or contractor agreements and then you can pay them accordingly.
When taking money out as a draw, remember the same three pieces of advice we stated above–the same rules apply! Only OWNERS can take a draw, so money must go from the company account to the owner’s account. If you have an intermediary entity, the money must go through that entity! And, as always, keep a record!
NOTE: Electronic transfers are acceptable as long as you jump through all the right hoops. But don’t let you bank statement be the only record. Keep a note of your contribution or draw in your company books!
BOOKKEEPING: This is simple. DO IT! It’s not that difficult. But if you really hate it, then you can hire professional bookkeepers rather inexpensively to keep your books for you. But either way, do it.
QUARTERLY TAXES: Even if you take out some money as salary with withholdings, you should still do quarterly taxes as a small business owner, even if it’s zero. You can file the forms yourself and find the forms HERE. See, Taxation, for more information about taxes.
RAISING INVESTMENT MONEY: If you are seeking “outside” money to fund your business, you may have to comply with SEC and state regulations. Please contact us if this is the case or even if you think it might be the case!
THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY.