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View Full Version : Single-member LLC - member equity and losses in excess of equity



sbsparrow
01-25-2012, 07:32 PM
Pardon the ingorance, but as they say, nothing ventured, nothing gained. First-time business owner and excited/scared as heck at the same time :)

A bit of info: Over the course of 2011, the company's first year in business, I contributed $4,700 in out-of-pocket expenses that I booked to my Due to Member account. Additional costs were incurred (funded by an outside loan) that resulted in a net loss of $40K for the year.

Here comes the ignorance...Questions:
1. In closing 2011, is it proper to reclass my Due to Member account balance of $4,700 to my Equity account?
2. How do I treat my $40K NOL:
a) Can I deduct a loss on my personal return up to my $4,700 Equity basis, thus zeroing out my basis?
b) Will this subsequently reduce my NOL to $35.3K? If so, what JE is used to do such?
c) How should I present/carry this remaining NOL? Negative Retained Earnings???

Thanks in advance,
sbsparrow

lucas.bowser
01-26-2012, 10:17 AM
1) There is no reason that you need to reclassify the Due to Member account balance to your Equity Account. Your books balance properly without it. This is more of a personal preference since you are a single member LLC. A Due-to account is a liabilty. It says this money is owed to you. Since you are the only owner, the equity is also "owed" to you. So at this time, it means the same thing even if it is semantically different. If you had a partner, then the answer would be you should not reclass it unless there was a corresponding change in ownership stake to reflect you having made an additional equity contribution in to the business.

2) I started to answer this question, but have decided upon further review that you need professional help (of the accounting variety.) This question is not straight forward and mechanical. It depends on several factors that you do not have a firm grasp on, based on your questions. If you want to do it right, I would recommend getting an accountant or professional book-keeper to review your books and help you make the entries. Otherwise you may be setting yourself up for a very bad audit down the road.

Overall, I suspect that your "books" are probably incorrect if you think that you only have $4,700 in Equity. It is likely that you took out the loan in your own name (instead of the businesses). If your business is not named on the loan, at that point you should have made an equity contribution and debited cash for $40K and credited owner's equity for $40K because the loan is a personal liability separate from the business. If the loan is in the businesses name, you should have debited cash for $40K and credited a combination of liability accounts for the $40K. I suspect you should have done the former and may have done the latter, but couldn't say without more information.

Either way, you need to make sure this is correct. Playing fast and loose with accounting can have very negative consequences down the road if the business goes bust, you are sued or audited. Just setting up an llc is not enough to protect you from your business liabilities. You must run your business separate from your personal life, which includes employing proper accounting for money coming in and out of the business and what is done with it in the business. This is a corporate control discipline you are expected to maintain. Otherwise you may be allowing your corporate veil to be pierced down the road in a civil proceeding.

Please consult a professional. Even if you are not glad now, you will likely be happy (or at least content) in the long run that you did.

Evan
01-29-2012, 12:01 AM
Biggest question is -- how is the LLC taxed? Based on your description, you didn't make any election so this is a disregarded entity for federal tax purposes. Then you're starting to describe corporate tax matters. Did you elect to be treated as a corporation? If so, did you further receive recognition as an S-Corp? You have potentially ONE of three entities: an LLC disregarded from its member (file Schedule C, E, or F, depending on the business); an LLC taxed as a C-Corp; or an LLC taxed as an S-Corp. If it is treated as a "corporate" entity, you will see why corporations are horrible vehicles for business entities which generates losses.