Results 1 to 4 of 4

Thread: New Small Business - Bookkeeping For Personal Credit Cards

  1. #1
    Registered User
    Array
    Join Date
    Dec 2017
    Posts
    1
    Thanks (Given)
    0
    Thanks (Received)
    0
    Likes (Given)
    0
    Likes (Received)
    0

    Question New Small Business - Bookkeeping For Personal Credit Cards

    Hello everyone. My wife and I just started a small online business. It's an LLC that we are choosing to have taxed as a Sole Proprietorship (Being married and living in a community property state, this is possible without having to go the joint venture route). We decided to each use one of our personal credit cards (2 for a total of $9k in credit) to help with initial costs: LLC Formation, new computer, phone service, etc. We decided to use Xero for bookkeeping and added both credit cards as accounts (which are treated as liabilities). We haven't had any business income (revenue) yet. It's all a loss at this point. We won't make our first dollar for another 2 or 3 months.

    I'm running into an issue for how to account for these personal credit cards on the books. Each were new, never used before and have only been used for business expenses. So in that respect, it's clean and easy. Until we get revenue, we'll be putting personal money into the business bank account to pay these cards off. From what I understand, we would create "Owner Equity Invest" and "Owner Equity Withdraw" chart accounts to accommodate putting money in and taking money out.

    So here are my questions:

    1. How do we account for these on the books? Do we just treat them as if they were business credit cards? Or do we have to attribute them as some kind of loan from the members? Or as a form of contribution?
    2. Does using these personal credit cards solely for business expenses (none for personal) diminish the LLC protections as it ties us more closely into the business instead of being a completely separate entity with its own credit cards?
    3. Assuming it *DOES* diminish LLC protections, if we get a business card in a few months and pay off these personal cards, and remove them from the business completely, does that put the protections back in place or is the damage done?


    Thank y'all so much for your time and assistance. I can't seem to find straight-forward answers to these questions anywhere.

    Mike

  2. #2
    Post Impressionist
    Array
    vangogh's Avatar

    Join Date
    Aug 2008
    Location
    Boulder, Colorado
    Posts
    15,063
    Thanks (Given)
    0
    Thanks (Received)
    2
    Likes (Given)
    254
    Likes (Received)
    522

    Default

    Welcome to the forum Mike. Sorry it's taken so long to respond. This is not my area of expertise so please keep that in mind when reading what follows.

    I'm a sole proprietor and it doesn't make a difference whether I use personal cards or business cards because in the end the IRS wants me to file as an individual, however I still keep personal and business purchases separate. I don't know if you can do the same when you have an LLC that gets taxes as a sole proprietor. I think in general, using your personal cards could diminish some protections of the LLC, because using personal cards sends the signal this isn't a business as much as extension of yourself. I say in general, because I'm not not sure if that holds true for an LLC taxed as a sole proprietor.

    I would definitely open a business account, with a card and I'd start using business cards from here on out. I think with the accounting situation you have now, you want to list these expenses as something you and your wife personally are lending money to the business and that the business will later pay back. I think you would record it the same way you would if a friend lent you money to get started. The idea is to record it in a way that makes clear this isn't money from the business, but money from you as individuals that's coming into the business until the business repays the money.

    As soon as you can I would recommend opening a business bank account and using that for all business transactions. Again, I'm not sure it's an issue with regards to an LLC taxed as a sole proprietor, but I suspect it is and you want to keep your personal and business as separate as possible. I don't think a few things you do know will forever cause issues, but I would work to make sure business and personal are separate as soon as possible.

    Sorry that I don't have specific answers to your questions, but hopefully my response will keep your thread active until someone who knows more sees it and can reply with more specifics.
    l Join me as I share my creative process and journey as a writer | StevenBradley.me
    l Design, Development, Marketing, and SEO Tutorials | Steven Bradley's Notebook
    l Get my book about Design Fundamentals

  3. #3
    Registered User
    Spera Connect
    Array
    Spera Connect
    enevins87's Avatar

    Join Date
    Mar 2018
    Location
    Connecticut, U.S.
    Posts
    10
    Thanks (Given)
    0
    Thanks (Received)
    0
    Likes (Given)
    0
    Likes (Received)
    1

    Default

    Similar to the last response, I am not an expert in this field and am certainly not a lawyer, so it would make sense to consult one before acting on a final decision.

    Anyway, I'm in the same boat, operating a LLC and used personal cards for early expenses before I got a business card and bank account. Along the lines of the first response, the tax impact really doesn't matter, as IRS wants you to file as an individual and everything passes through your income.

    The only potential issue could come if you're concerned with personal liability issues. That's where strong division of personal and business is important. Although, that being said, the fact you've used these personal cards only for business expenses would be at least some defense for you if some liability issue came up. And as long as you get business accounts set up and transition to those, I think over time the LLC personal liability protections become more favorable for you.

    Good luck with your new business!

  4. #4
    Registered User
    Array
    jamesray50's Avatar

    Join Date
    Nov 2010
    Location
    Missouri
    Posts
    767
    Thanks (Given)
    0
    Thanks (Received)
    0
    Likes (Given)
    2
    Likes (Received)
    32

    Default

    The way I would do this is to set up a liability account called Shareholder Loan, or something to that effect. When entering expenses from the credit card, debit the expense and credit the Shareholder loan. This will record the business expenses on the P & L and the Balance Sheet will show that the company owes you money. When the company pays the credit card payment debit Shareholder loan and credit the bank account.

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •