Putting money into LLC and/or S-corp via loan? 1099?

My tax return is coming soon and I wanted to put some money into my LLC for use as advertising to ramp up business. I was talking with a CPA the other day about how to put more money into my LLC. He said that it has to be done via a loan. That’s fine. I’ll loan my LLC 0% on purchases for 12 months and 0% for life as long as I make 2 purcahses per cycle. I get credit card offers for those in the mail all the time. Haha! I guess the first question should be, is that legit? The second question is, how do I go about the paperwork for the loan? Can I just write it on a piece of paper? A napkin? As you can tell, I’m new to this; my LLC is less than a year old. For that reason, I believe I’m past the point of being able to just contribute additional startup capital.
Also, I heard that if my LLC defaults on that loan, I can just 1099 the LLC and handle things from that angle. What would be the paperwork needed to 1099 my LLC?
Thanks for all the info.

Dean

What does your operating agreement say? All these questions should have been addressed when the LLC was set up.

It is so screwed up now, you are better off dissolving it and starting with a new one that is set up properly. Before you do that, you should really educate yourself on how an LLC actually works. The way you talk and act, there is no difference between you and the LLC. Your LLC is just a waste of money and time at this point.

What does the operating agreement say about what? How it can receive funds? How it can apply for loans? How capital can be contributed?

I suppose I could just give it money out of my pocket, but that would be too close to mingling funds, thus, I’ve held off on that. Overall, its just a general LLC geared towards rental properties. (There are specifics about that in the Operating Agreement). It currently holds one rental property that barely breaks even, thus it doesn’t have enough positive net income to purchase signs and bulk fliers and other typical “House For Sale/Rent” type advertising materials. It does cover mortgage and other costs each month, though. I was only thinking of putting in $1000 or so dollars. That should easily cover a decent amount of advertising for this year.

I have heard that one possibility is to just buy the For Sale signs, posterboard, wooden stakes, etc. at Home Depot with my own money. Since the transaction would be small, it can just be expensed by the LLC. True, the hassle of this may be more than its worth at this point, but the long term goal is to make this an official business. If I don’t get in the mindset and habit of treating things that way now from the get-go, then when will I ever?

Dean

Absolutely. The operating agreement defines how the LLC conducts business. It isn’t your personal piggy bank. You need to be extra vigilant if you are the sole member and manager.

You can give money to the LLC, just like a partner puts capital into his partnership. Your ownership interest increases accordingly and you get a right to larger distribution. It’s not commingling of funds. Commingling is using your personal funds to pay LLC expenses like For Sale Signs.

I don’t know where you are getting your information, but much of it is bad. You aren’t treating it like a business. You are treating it like an extension of yourself. One way to get into the proper mindset is to think that you are acting on behalf of the owners instead of yourself and that they will question each decision you make. You need to document every major decision with a resolution and adhere to formalities for your state.

Loaning money to your LLC is legit - as long as it is REALLY legit. So, to comply with the “legitimacy” of your loan, you will have to have record of this loan transaction from A to Z.

1 - Your LLC needs to fill out and submit to you a loan application (use a generic one from the bank or the residential 1003 form)
2 - You need to give the LLC the terms and payment via a NOTE (again a generic one is fine or a basic Promissory Note)
3 - It’s better if you actually charge an interest rate. You can do a 0% promo period, but eventually the LLC should make payments back to you. It’s a hassle, but it is really better than just waiting a couple of years and 1099ing it as a bad debt. Save the bad debt move for a really big investment or other income splitting strategy where you will really need it. The IRS regularly nabs people employing the “ole’ just 1099 it as bad debt” move.
4 - Don’t forget to write off the interest payment the LLC makes to you off the LLC’s tax return - even if it flows through, you should still record it “legitimately.”

I got my tax return back. WooT! So, time to put some money into my LLC for advertising. I’m wondering if I’m making this whole process more complicated that it really should be. Technically, my LLC does the management and holding work for my rentals. Can I just pay my LLC via 1099 for doing property mangement work for me? Then my LLC just uses that money for its advertising campaign? What are the pro’s/con’s of this idea? Thanks.

Dean

how is the LLC being taxed?

Without having the Operating Agreement with me at work, I couldn’t tell you, but I filed form 1065 for it this year.

Form 1065 is for partnerships.

Yes, it was for my LLC. The partnership would be my wife and I.

the first question is what does the partnership do for income? does it own rental properties? does it charge you a management fee for the properties you own?

in other words, the partnership is a sham if it does not have a valid business reason for existing. (this does not address whether having a partnership manage properties that you own is smart or not, just whether it is valid)

Now, assuming that the partnership has income, it is entitled to deduct business expenses for pursuing that income. If it charges you a management fee, then it will have the cash it needs to pay for advertising the properties it manages. If it collects rents from tenants on properties that it owns, then it has cash to advertise the properties it owns.

you don’t need to “put money in.” the partnership should have money derived from its business operations.

from time to time it becomes necessary to provide working capital to an entity. This can be done by capital contribution or loan, but you should not “pay” the entity unless the entity is providing you a service.

the earlier post is correct: you need to quit viewing the entity as “yours” and start running it like a business.

Yes, the LLC owns rental properties. All rents come in and all mortgages are paid out from the LLC’s checking account. There are a few side expenses here and there (directly to the business) and those are also paid with the LLC’s credit card and paid out from the LLC’s checking account.

No, it doesn’t charge me a management fee for the properties, although I suppose it easily could. The reason being, and this is the real problem overall, it doesn’t make enough money to barely break even. I know, I know, negative cash flow and all that. I’m working on it, but that’s not the point of this thread. Whatever the reasons, the end result is that the LLC needs some cash influx from somewhere. Initially, from a direct loan or capital or donation or being paid for something or whatever. With that money, more advertising leading to more property acquisition, more rental income, most likely selling of the negative cash flow property, finally positive cash flow. I’m trying to figure out how to get this done in the most simple, yet official way.

My thought process on “paying” the entity is that it handles all the administrative (paper)work of the rentals. Thus, since it functions technically as a property management company, I would interact with it in that manner. I thought that might be the easiest way to put money into the business.

you need to quit viewing the entity as "yours" and start running it like a business.
Ok, I'm trying to grasp this concept. With the LLC, I am the General Mananger and my wife is the Treasurer. So, how am I to distinguish the differences between me and "it", since I am the General Manager, President, CEO, CIO, CFO, employee, boss, secretary, cook, chef, busboy, bellboy, batboy, waterboy, etc. etc. etc. As far as I understand I am the business, i.e., it is mine.

Now, don’t go on and tell me that I’m a dumbass and don’t know what the crap I’m doing and quit trying to run a business when you can’t… ARGH! No one seems to hesitate in repeatedly alluding to that. I get it! That, however, does not help me achieve the goal of a proper business structure. The whole point of this thread and question is to get one step closer to that. At this point in time, when things aren’t that critical, I have the liberty of stumbling around to get all my ducks in a row. Therefore, when I do come to the point of necessitating a proper business structure, I’ve already gotten everything taken care of and I can smoothly move forward as opposed to running around like a chicken with my head cut off trying to last second everything and miss out on future opportunities.

Now, onto the S-corp. It didn’t make any money because it barely started in the last half of last year and I’m working on aquiring properties for it. Its long term goal is to have enough properties that real-estate is inventory as opposed to capital gains. Also, plans for it are to pay my wife’s salary (and eventually mine), HSA, kids 401’s (they will be employees), future employees’ salaries as growth occurs, obviously tax deductions, and anything else that comes along. Remember, I prefer to be ready to go ahead of time as opposed to last second’ing everything. Honestly, handling the necessities of a low activity S-corp don’t bother me really that much. I believe the reason why the S-corp isn’t more up and going is simply because it doesn’t have the advertising power. Thus, I wanted to put in a thousand or two and hit advertising with that. If, in the end of this year, things aren’t going that well, I’ll probably discontinue the S-corp next year and just stick with the LLC.

So, in summary, I need to put money into the LLC and S-corp. I want to do it as simple as possible. I want to do it as officially as possible. The LLC and S-corp are distinct in that they have specifics spelled out in their Operating Agreements/Articles of Incorportation (I hope no one asks me to cut and paste the entire things here for review; they’re both quite large :shocked ). Overall, the activites relate to real-estate, thus I figure money for advertising is a legitimate and simple first step to get experience for bigger steps later on. While they’re both less than 1 year old, I think it may be too late for startup capital since I filed the first tax return already and the IRS approved it and sent me check for the refund. That’s why I haven’t considered that possibility.
Now we keep going back and forth, back and forth in this thread. Is it truly such a :banghead thing to give my business $1000?? All I want to do is get $1000 from my wallet to my business’s checking account without having the IRS or Chamber of Commerce getting pissy at me. Isn’t there some form: fill it out, cut the check, file the form? Its not like I’m trying to smuggle cocaine in from Columbia! :anon From the way this thread is turning out, I could have an easier time buying marijuana downtown and be worried less about those legal ramifications. Haha!

Dean

P.S. Yes, I will re-read over the Operating Agreements/Articles of Incorporation and look for funding “instructions”. I keep forgetting each night as I get busy looking for real-estate deals. In any case, I’m still looking for people’s input, because if someone has a good idea, and its not already in my documents, I’d like to ammend it in.

Why complicate things? If it’s your business and you are the sole owner, you can give the business as much money as you want. Of course it’s tax free - I think the proper term is an “owner equity contribution”…you’re just giving it operating capital. Don’t bother with a loan. Just give it $5k, $10k or whatever.

Just write a check from your personal account to your business account.

If you have a partner, then each of you contribute the same amount of money.

Just keep copies of the checks so you can prove that it was an owner equity contribution and not a sale, in the event you’re ever audited. That’s basic recordkeeping anyway.

Bam, nice & simple.

Good luck with it.

My thought process on "paying" the entity is that it handles all the administrative (paper)work of the rentals.

paying for services is a valid business transaction. you would have to pay another company for this service, no?

regarding cash for operations: you can pay the management co for services, make a capital contribution or make a loan. If you personally pay for company expenses, you should submit an expense report and await reimbursement (doesn’t have to be any time soon). The company records the expense and the liability (accounts payable) on the company books.

this goes directly to the point of viewing the entity as a seperate business. Your OP implied that you are viewing the “hassle” of properly conducting business and financial transactions as unnecessary. They are.

have heard that one possibility is to just buy the For Sale signs, posterboard, wooden stakes, etc. at Home Depot with my own money. Since the transaction would be small, it can just be expensed by the LLC. True, the hassle of this may be more than its worth at this point, but the long term goal is to make this an official business. If I don't get in the mindset and habit of treating things that way now from the get-go, then when will I ever?

you should keep your financial involvement with the company at arms length (like you were just an employee or director of IBM) irrespective of how involved your are with daily operations.

Ok, I got back the tax return finally. I’m ready to start up some advertising. I’m leaning towards the capital contribution idea. Is there a specific form for this? Or do I just need to log it in the LLC’s books? Thanks.

Dean

need to log it in the LLC’s books