Author Topic: Best Way to Fund My Single Member LLC?  (Read 389 times)

WindRiver

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Best Way to Fund My Single Member LLC?
« on: March 24, 2017, 01:27:48 AM »
Hello,

I am in the process of starting my first business. I created a LLC and plan to use the LLC to purchase the assets and goodwill of another business. I am struggling to decide on the best way to fund my LLC to make the purchase. I'd love to hear your opinions on the best strategy for my situation. I did read this article by Keith, but still have questions. http://wealthyaccountant.com/2016/09/28/why-i-like-credit-card-debt-in-a-small-s-corporation/

Purchase Price: $50,000
Expected Yearly Net Income: $35,000
Business Type: Summer Seasonal, so earnings will be available in total by September.
Assets: Primarily goodwill.
Bus Org: LLC but perhaps will file taxes as S-Corp
Household Income: $90,000 in w2 wages not including new business.

Available Funds
Personal Savings: $20,000
Personal LOC: $30,000 @ 12%
Personal Credit Card: $20,000
Business Credit Card: $10,000 with no interest for 9 months

So what are the main differences between making a capital contribution to my company vs making a loan to my company or are they the same? Does a loan require a complex promissory note? What interest rate should I charge my business? The models I created favor simple capital contribution but I'd like to have a little more confidence!

Thanks for reading,
Mark


KeithTax

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Re: Best Way to Fund My Single Member LLC?
« Reply #1 on: March 24, 2017, 01:52:01 PM »
Capital investments are generally used to buy stock in the firm. With an LLC you can add capital anytime you want and there is no stock. Capital increases your equity basis and loans from shareholder increase debt basis. I have a post in the queue. It will be a while before I publish it as it is a complex area of tax law. But, soon.

I like the "loan from shareholder" account so the equity accounts stay clean. Example: Money going in and out of the firm from owners are treated as loans to and from the shareholder. This keeps all the transactions in one place in your accounting program. Loans to shareholder can be wiped out as distributions at the end of the year. Interest rates are low right now so the loan to the LLC doesn't need to calculate interest expense for the size company you suggest.

Finally, you indicate $35,000 of profit. Anything lower and the S corp idea starts to fail in tax savings. And you NEVER want a loss in an S corp while required to pay wages to owners! Goodwill is amortized over 15 years. Business credit card debt does NOT add to debt basis and could be a problem if the S corp has a loss and distributions are taken. The personal credit card is a loan from shareholder and what I mentioned in the blog post. It does add to debt basis.

WindRiver

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Re: Best Way to Fund My Single Member LLC?
« Reply #2 on: March 26, 2017, 12:30:59 AM »
Thanks for the response Keith!