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    3 Replies Latest reply on Jan 25, 2008 12:21 PM by handprint

    Question about maintaining LLC protection

    littlefish Newbie
      I own two small businesses in their entirety. One is a Sole Proprietorship and the other is an LLC. I pay income taxes for both businesses on a 1040 Schedule C.

      During calendar year 2007, I purchased goods and services for the LLC and paid for some of those expenses out of my Sole Proprietorship checking account.

      I now understand that, in order to maintain the liability protection of my LLC, I should not have mixed funding sources in this manner. However, I am wondering whether I can do something now to undo that mistake. Which of the following would be the best course of action:

      A) Record these expenses in my Sole Proprietorship accounting ledger. Then "sell" these goods and services from my Sole Proprietorship to my LLC and transfer funds from one checking account to the other, accordingly.

      B) Transfer the appropriate funds from my LLC checking account to my Sole Proprietorship checking account, and record the expenses in my LLC accounting ledger only.

      C) Don't transfer any funds between checking accounts. Enter the expenses in my LLC accounting ledger and record the dollar amount of the expenses as a capital investment in the LLC.
        • Re: Question about maintaining LLC protection
          LUCKIEST Guide
          little, you asked this question before. RIGHT??
          Question about reconciling expenses. First of all welcome to the website...
          You operate on a cash accounting basis. Do you have an Accountant??
          Being on a cash basis, transactions end on the last day of the year.
          Yes you can simply backdate a check to December 31st, 2007 until you are audited.
          Then you have a problem.
          Operating on a cash basis means just that. Cash that comes in up to Dec 31. and
          Cash that goes out up to Dec 31.
          Talk to your accountant.
            • Re: Question about maintaining LLC protection
              littlefish Newbie
              My original post was in the "taxes" forum. After making that post, I learned that this is not really a tax question. It is really a legal question because it pertains to maintaining the liability protection of my LLC. There are several ways to reconcile this problem from an accounting standpoint that are acceptable to the IRS, but my question is which is the best way to maintain my liability protection.
            • Re: Question about maintaining LLC protection
              handprint Newbie

              The correct answer is B - transfer the funds from your LLC account to the sole proprietor account. Then book the expenses in your LLC account.


              When you paid for the assets through your sole proprietor account, that was like a pseudo "loan" from the sole proprietor to the LLC. Now if the LLC pays back the sole proprietor, then the sole proprietor is made whole. The LLC then books the expense to the sole proprietor as repayment of a loan that the LLC used to purchase assets.



              All entrepreneurs and business owners,

              My name is David Walker and I am the managing partner of Handprint Group ( - Strategic Business Planning.

              We are a group of former busines attorneys who now focus on consulting startup and small businesses on structuring their company for growth and fund raising.

              I am new to this forum, and I am offering a free half hour phone consultation to discuss your business.

              Please email me at and visit our site for further information.

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