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Comingly of Money

We’ve mentioned this previously, and we’ll do it again here.
  • Rule #1- Please get a separate checking account for your business, preferably with the same bank as your personal checking account so transfers (shareholder distributions) are easy
  • Rule #2- Do not pay for personal expenses or any mixed-use expense with business funds.This is bad for several reasons- the IRS hates it. It erodes the corporate veil which is already dangerously thin since you are a closely held corporation. Lastly, if you need to re-construct your financials because of a QuickBooks disaster or some other disaster, having your business transactions compartmentalized within a bank account makes life better. All money coming in is income. All money going out is an expense or a distribution.
Do you get the feeling that we’ve said these words before? Like déjà vu? Ever have vuja-de? It is the feeling that this has never happened before- opposite of Deja-vu. Yes, we did mention this before in our chapter on operating your S Corp. Here it is again.
Read Rule #2 again. It is imperative to keep an arms-length perspective on you, the employee, and relationship with the S corporation. If you worked for Google or Ford, you wouldn’t be able to get the business to buy your groceries or pay your mortgage directly. Same thing with your business. Here is another quick table to help you out with the “Which debit card should I use?” question.
Cash Outflow & Checking Account To Use
  • Car Lease Personal, unless lease is in business name.
  • Gas for Car Personal, unless owned / registered by business
  • Estimated Tax Payments Personal, since an S Corp is a pass-through entity
  • Cell Phone Personal, reimbursed through Accountable Plan
  • Home Utilities Personal, reimbursed through Accountable Plan
  • Home Office Renovations Personal, possible partial reimbursement
  • DSW, Banana Republic Personal, but it would be nice
  • Shareholder Distribution Business
  • Self-Employed Health Insurance Business
  • Out of Pocket Medical Personal, unless you have an HRA
  • Accountable Plan Reimbursements Business
  • 401k Contribution Business
  • SEP IRA Contribution Business, but you should use a 401k instead
Read our chapter on operating your S Corp and specifically the section on Accountable Plans for more information on getting reimbursed as an employee of your S Corp for those expenses that are both personal and business such as cell phones, home offices, internet, etc.

Can an LLC Be an Individual or Sole Proprietor?

Many people ask me this question and assume that if they are an LLC (I like to say it stands for Lawyer’s Likely Choice) they are protected and plus it sounds important. Here are the facts: a limited liability company (LLC) cannot be a sole proprietor, but an individual can do business as an LLC. Confused? Let me explain.
If you are a sole proprietor, you own and operate your own business, but it is not a corporation. A limited liability company is a business structure that is not a corporation and not a sole proprietorship. If you wish, you can register a business that you own and operate by yourself as a LLC, protecting you from business liabilities while still keeping the tax benefits of a sole proprietorship. For mostly small closely held companies, a good umbrella policy (cost is about $500 per year) will protect you just as well. If someone wants to sue you, will they still be able to come after your personal assets if you are an LLC? Yes. It’s called “piercing the corporate veil”.

Sole Proprietor Basics

As its name implies, a sole proprietorship is a company owned and operated by a single person. If your business is not a corporation or limited company and you are the sole owner of your business, it is a sole proprietorship. As a sole proprietor, any business income you earn is considered personal income when you file your taxes. The downside of setting up your business this way is you are personally liable for any money your business owes and are personally vulnerable for any lawsuits filed against your business.

LLC Basics

An LLC is a hybrid business that marries some of the features of a corporation with some of the features of a sole proprietorship. Unlike a sole proprietorship, if you are registered with the government as an LLC, your business assets and liabilities are legally separated from your personal assets and liabilities. Moreover, unlike a corporation, income you earn from your LLC is treated as personal income, just like it is if you are a sole proprietor.

LLC Members

Owners of an LLC are considered members, not shareholders. An LLC can have an unlimited number of members. If an LLC has more than one member, profits and losses of the company are divided based on their membership percentages. Each member writes off their portion of losses and reports their portion of income on their personal tax returns. If you are the only member, you record all company profits and losses on your tax return in the same way as a sole proprietor.

Tax Benefit

Both sole proprietorships and LLCs have a tax advantage over corporations. Corporate profits are taxed, and then corporate shareholders are taxed on dividends and capital gains they earn. This constitutes a form of double taxation. If you establish your business as an LLC or sole proprietorship, you avoid this double taxation as company profits are taxed only one time as personal income.
Seeking out professional help like The Edwards CPA Group will help you select the right choice for yourself and your family.

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