What If I Start Making Money BEFORE Opening An LLC?

Question

I've got just about everything I need to get my real estate note brokering business started. I've got my office set up, my business phone number, my mailing list. And my business's new website should be ready in a couple of days.

The only thing I don't have is a business entity set up. Right now I'm simply Doing Business As (DBA) ForwardMotion Marketing. Now I do plan to open my own LLC eventually. But what if I decided I'd like the business to start making money before I set up my LLC? How would that affect my tax situation?

Hypothetical: What if I closed two deals as a sole proprietor, then set up an LLC and closed, say, ten more deals. At the end of the year, for tax purposes, would the LLC absorb all the profits (since the LLC will have been opened in the same year), or would only the ones I closed since the exact date of opening the LLC be taxed as LLC profits?

Jared K. · Answer

I have had 2 LLC's. There are benifits to an LLC if your income through them are substantial enough to compensate and protection of liability etc. I would discuss the tax pro's and con's with your CPA or tax firm before moving forward and consult with your attorney about the same. An LLC is easy and inexpensive to start on most state websites but not so cheap and easy to shut down.

If you make $ in your name before starting an LLC the income will just be attached to your taxes.

Steve Babiak · Answer

You would have to actually run your business through the LLC if you want the taxation to follow rules for LLCs. An LLC can elect taxation as a corporation rather than as pass through, so your accountant should be consulted on the taxation pros and cons. Form the LLC before getting a tax ID and bank account for it; the banks will require the organization docs of the LLC and the tax ID before they will open a bank account for the LLC.

Nathaniel Busch · Answer

Eric,

The IRS is going to look to the legal owner of those profits. An indication of legal owner is usually who is on title at closing and/or who is the owner of the bank account receiving the profits at the time of deposit.

Simply having an LLC in existence that has not yet established its own bank account would not be enough to argue ownership of the deal. In this situation, you would want the paper trail to back up the story in order for ownership to be successfully proven to belong to the LLC.

I would advise getting a bank account and EIN in place ASAP.

Nathaniel Busch, CPA

Eric B. · Answer

@Kathleen Leary Thanks for the advice! I honestly did not know that about LLCs. Maybe I'd better get some advice in that area!

Kathleen Leary · Answer

An LLC is a flow-through entity - the money made through the LLC is taxed as if you earned it yourself. It's designed to Limit Liability, not shelter income from taxes. You may want to get some in-depth tax advice from a professional before proceeding. Just my two cents' worth.