New business and filed an LLC but little income.

[jenilyn8705]

Hi,

I few months ago I started a business but with the end of the year coming up soon I'm anticipating that there's not going to be much in terms of income cause its just been taking a while to really market myself (online work so far).

So I filed for an LLC (upon recommendation) about 2-3 months of doing work for it and investing in it. I've kept record of all my expenses and the limited income that I have gotten, but I haven't yet opened a bank account which I know is required for an LLC.

Considering my current situation with income I'm starting to get concerned about my taxes for next year (and my own limited income is heightening that a bit). So I have some questions:

1. Should I even bother to keep this LLC that I registered or just cancel it and go to sole proprietor?
2. If I were to keep the LLC and have a separate business account, how do I actually list all of these expenses that I've had for starting the business that I've made personally to be sure it is written off?
3. When opening the account, how much should I put in there?

[vangogh]

Welcome to the forum Jenilyn. First know that I'm not an expert on LLCs. My business is currently set up as a sole proprietorship. I wanted to reply to your thread though, to help keep it active.

It's really up to you whether to keep the LLC or cancel it. I would think their are pros and cons to each and you'll have to evaluate them in your situation. I'm not sure if you can list the expenses if you've been using personal money, however, I'm thinking as long as the expenses were legitimate business expenses there would be a way. For example you might be able to have the LLC buy the items from you or have them considered a loan from you the person. Again this isn't my area of expertise so I'd recommend asking an account.

As far as how much money you should put into the account when you open it, it's again up to you. I don't think there's a specific amount you need to put in as an LLC. Depending on the type of account you open, your bank may have some minimum needed for the account. You do want to use the account for all business transactions. Money coming into the business should go into the account and expenses should all be paid on the account. If you have some expenses coming up you'll want to put at least that much money in. Ideally after a little time has passed, money will come into the account and not all of it will come out.

Getting back to your original question you may decide it's easier to be a sole proprietor at first until the business is making more money. The main reason for an LLC is the limited liability. Depending on what personal assets you own and might be at risk you may or may not need that protection right now. I think there are some tax breaks to having an LLC, but if the income isn't there yet, you probably won't able to take advantage of them right now.

Hope something in there helps.

[Freelancier]

As far as the IRS is concerned, a single-person LLC is really just that person, so there's all it is is a financial construct to help you keep track of expenses.

However, as far as the courts are concerned, an LLC is an entity separate from its owners and can help shield its owners from liability claims for legal actions (not illegal ones) taken on behalf of the LLC. This assumes you run the LLC like a separate entity, but generally speaking that's the entire point of a single-person LLC: it's a liability shield.

I do LLCs for all smaller businesses that need that shield... and to shield them from each other, so that liability issues don't bleed to other businesses I own.

To your questions:

1. Yes, if you think your business needs a liability shield to protect your personal assets, keep that going.

2. Pick up a copy of Quicken or Quickbooks (for example) and keep track of expenses and income that way. Talk with your accountant about which is the better fit for your business going forward.

3. As much as your bank needs for you to open the account and as much as you want. When you have expenses that you pay out of your own pocket, just record them as expenses to you in your accounting package and then pay them to yourself as reimbursement when you get the income to support it. We have two businesses that we started with $5K in the bank account and they just have large payables to me for out-of-pocket expenses. The payables already ended up on my tax returns (because as single-person LLCs, they are the same as if I spent the money anyway), so right now it's just a way to keep score.

[tallen]

Whatever amount you use as the opening deposit for your new business bank account will generally be categorized as "opening equity" and represents your investment into the business. You can then reimburse yourself for the expenses you've already incurred by writing yourself a check from the business account -- IF you have enough cash in that account. If you don't have the cash in the business bank account, you can still record the expenses to the business as expenses in a current liability account (a book-keeping account), and then reimburse yourself when and as the business get's cash. It is likely and not unusual that your business will show a loss for at least the first year. This loss will offset some of your other income, and reduce your overall tax liability for the year. (disclaimer: not a CPA or other tax expert, just my experience so far)

[Business Attorney]

1. While the main reason for keeping the LLC going should probably be the liability protection, there are other reasons. First, there is often a perceived marketing value of being an entity rather than an individual. Second, it may make selling the business or taking on partners easier at a later date, particularly if the business has agreements or licenses in the business name or assets that need to be registered (such as vehicles). You can transfer an interest in the LLC rather than worrying about transferring each agreement, license or asset individually. Third, if you get an EIN for the business (not necessary if your SMLLC doesn't have employees), you can give that to people instead of handing out your social security number. There are a few other reasons as well. The only downside is the cost of filing an annual report with the state.

2. Whether you have an LLC or not, you will account for the costs the same way on your Schedule C to your Form 1040 (assuming you have not made an S election. In addition to Quickbooks there are a number of free online bookkeeping programs such as waveaccounting.com

3. You should put in enough to cover a few months expenses. One of the tests for piercing the corporate veil (http://www.illinoisbusinessattorney.com/articles/piercing_veil.html) is whether the business was adequately capitalized. Also, a word of caution is that if you ever decide that you want to have your business certified as a women's business enterprise (WBE), you will be asked for documentation of your start up capital, so write a check from your personal account (no electronic transfer from another account) and keep a copy of the check. The reviewers have not yet made it into the electronic age and are much more content with a paper trail.

[vangogh]

Whether you have an LLC or not, you will account for the costs the same way on your Schedule C to your Form 1040

I didn't know that. I always assumed filing was done differently with different forms. Good to know.

[jenilyn8705]

Ok, that all makes more sense. Thanks everyone!

[vangogh]

Glad we could help, though by we I mostly mean everyone, but me, since I don't know how valuable anything I said was. :)