As I'm getting the foundation of by business started, I'm trying to take into consideration the tax implications as well as the legal implications of the money I spend. Since I don't know the answer to this question, I've actually been delaying some of my actions so that I do this the ideal way tax-wise.
I have two main concerns (one on the tax side, one on the legal side):
1. I want to be able to deduct business related expenses. Until I have a separate entity set up, I cannot conduct these transactions in the entity's name. If I incur some expenses before that point, and some after that point, will there be complications or risks in deducting all of this as part of the same business?
2. Once I have an LLC set up, and before I've completed any deals what is the best way to keep it funded for expenses? I'm considering things like membership fees, separate phone line, the cost of the LLC setup. Also regular large expenses like marketing. Since this can add up quickly, from a legal standpoint am I making my LLC protections vulnerable by regularly depositing personal funds to the LLC checking account? Since that first deal to complete may be many months down the line, it's hard to know how much to use to seed this account. Or, is this approach fine, and the LLC can just reimburse me for these expenses at the point when the capital is there?
Great questions! I"m in the very same predicament! Awaiting answers...
Sorry, this is really vague even though it is rather specific so, the real answer is you need a conversation with an accountant.
There are expenses related to the business that can be capitalized and expensed prior to formation in connection with the business.
You may pay expenses and it is a capital contribution to the company. This will be stated in your initial journal entries. Set up a checking account for the company, make you payment to the account then write checks off the company account to pay expenses incurred. Never write a company check for some personal matter. When you need funds out of the company write a check to you, below on the "for line" write "DRAWING" that means it goes to your pay and will be taxable to you and you can also have expenses, like gas that you can elect the appropriate tax treatment for. Keep very good records.
The question should be when writing a company check should be "Am I benefiting personally from this amount?" Some things may just be questioned too, never write a check for cash, don't buy stuff at the grocery store, office coffee is fine, just avoid anything that could be viewed as being some direct benefit for you or your family.
You really need to speak to your account before you begin setting up a company. If you do it yourself, at least have your attorney glance at your operating agreement, that is the important issue.
Good luck :)
Join the Largest Real Estate Investing Community
Basic membership is free, forever.