Personal expense as an LLC

[xandrew245x]

Our business converted to an Llc from sole proprietor last year. I also started using quick books for our accounting.

First question is, how are the owners personal expenses paid? From what I understand personal expenses would still be paid from the profits of the LLC, but would need to be documented as personal. The plan was to have the person expenses paid out of a personal account, and then one check reimbursed to them from the llc and mark that as personal expense.

Second. Any money moved from the LLC to a personal account needs to be documented in quick books correct?

How would you document a owner taking money from the business and putting it into a personal savings? I was thinking it would be a transfer of funds from one account to another, not an expense.


If a check was wrote out for cash by the owner, that would need to be document as a transfer from checking to cash on hand correct?

Im trying to get this figured out because we are getting mixed answers from some professionals we have talked to.

Thanks in advance!

[nealrm]

The company should not be paying personal expenses or reimbursing personal expenses. That goes for both a LLC and a Sole Proprietorship.

If there is only a single owner, the owner does a withdraw of equity. It is recorded as such in the companies books. Once the money is moved to the owners bank account, he can do as he pleases with it. The company is no longer involved.

FYI - you should have separate accounts for the business and the owner.

[Fulcrum]

As Nealrm said, it's best to keep both seperated. However, there may be times when this doesn't work.

I use a personal credit card for business purposes, but the paper trail needs to be impeccable. Vendor invoices need to match up to charges on the card and you must have copies of all the invoices. On the other side, all withdrawls from the company books to payoff the expenses need to match the charges against the card and must be noted as such. I'm not an accountant so verify with yours to ensure compliance.

[xandrew245x]

Thanks for the replies. I did some more reading and finally figured out how to add owner equity in quickbooks, it wasn't a preset category.

We already have personal and business accounts, the business has been established for quite a long time.

There was a lot of confusion because not only did we change from sole proprietor to LLC last year, we started using quickbooks and I took over the accounting aspect of the business. So between me, the person who used to take care of it, the accountants and the attorney who converted us to LLC , there was a lot of confusion and discrepancies on how to do it.

Last year I did not document the withdrawals correctly, but i'm going back and correcting them now.

Now when ever a check is wrote out for the owner it will be documented as a transfer to owner equity. I think what we are going to do this year is set a salary and then disburse payments from the business to personal checking on a bi-weekly schedule. I read somewhere if you file as S-corp, which we do, any working owner has to be on payroll. The major problem I had last year was the owner using personal cards, or personal cash to buy items for the business, which this year were trying to stop from happening all together, and having everything business related be paid for with business only cards and checks.

I think I have it figured out for the most part now, if something was bought for the business with personal money, how would that be documented then in quickbooks? Thats about the only thing I'm still a little unsure about.

Also the owner's wife is the one who we make the check out to when a owner equity transaction is made, she is the one who takes care of all the bills, however she is not an actual owner of the business on paper. Should the checks be made out to the owner, or is it okay to still make them out to the owner's wife?


Its tough taking over a family business, especially when things have been done a certain way for years.

[tallen]

Just to be clear, a check written to the owner for his "draw" should be a transfer FROM owner's equity rather than to owner's equity -- when the owner takes money out of the company, his equity in the company decreases.

However, salary payments would be charged against the salary and wages account. Be sure to withhold appropriate taxes, and pay the company's share of FICA and unemployment.... in other words, make sure you are including the owner's salary in your payroll process (I assume you use a payroll service rather than "rolling your own?").

To reimburse the owner for things bought for the business with personal money, write him a check, and in QB record that against the appropriate expense account where you would record the transaction if the company had bought the item directly. Add a memo noting the vendor the item was originally purchased from, and of course be sure to file that original receipt.

[xandrew245x]

When I enter the transaction I add a check, I add the name, then it the account its transferring from would be checking and then the category would be owner equity. Doing this documents the money being paid as a salary to the owner, but does not change the profits the business made so it can be taxed properly.

[nealrm]

One thing to note, the mixing of personnel and business expenses has more than just tax ramifications. If you start mixing the two, like using a personnel credit card too many times, you can loss the protection of the LLC.

[xandrew245x]

Thanks for that Neal. I am going to make sure this year that business expenses are only paid with business money. I know sometimes a personal item that can be wrote off as a business expense would be filed under our business expenses, but that wasn't often.

I'm going to set up a salary for the owner and then pay biweekly and mark it under owner equity and I should be good to go then.

I'm still learning a lot of this, and I do plan on taking some accounting and business classes next semester.

[SumpinSpecial]

I'd like to hear if I'm correct about this, but since you mention writing checks to the owner's wife because she does their bookkeeping/bills, I would make her the company employee and put her on salary. I think that would keep things more clear for the money trail.

But really it depends on how their personal banking is set up. If they co-own their accounts and both have signatures on file so that they can both sign checks and withdraw money, then you can make him the employee and put his name on his salary checks and she can still sign and deposit them.

[xandrew245x]

Both their names are on the company bank account, she had taken care of all the finances for the business up until last year and always wrote the checks out.

From what I understand since we file S-corp the owner has to take a salary, he never takes any money from the business, his wife does because she takes care of all the person finances.

I'm not sure about their personal accounts, I believe they are both on the same account, but I would have to just double check.

She essentially is getting paid the salary that the owner would be taking.

[nealrm]

But really it depends on how their personal banking is set up. If they co-own their accounts and both have signatures on file so that they can both sign checks and withdraw money, then you can make him the employee and put his name on his salary checks and she can still sign and deposit them.

No, you should't do that. Yes, they would get paid the same, but it would mess up their taxes and your bookkeeping. Her salary needs to be recorded under her SSN, and not in her husband's name. This is the type of shortcut that results in very little times saving and huge headache down the road.

Also, owner equity withdraws need to be to the owner and not to a relation of the owner. If she is a part owner, then write the checks to her, if not write them to him.

Just do it right in the first place.

[xandrew245x]

She techincally doesn't work there anymore, she hasn't for the past two years. This is the way they have always done it, and I know it is not right. She would also take checks that customers paid for their invoices with and she would deposit them right into her personal account. She doesn't do that now, but i'm still fixing it from last year.

I'm going to have the checks made out to the owner and mark it as his salary, is it fine however for her to take them and deposit them then?

When they file for taxes, they always file together, she has never actually took a salary the entire time she actually worked there.

[nealrm]

What a mess!!!

What is done is done, there is not really anyway you can undo it but you may be able to clean it up. At this point you need more help than what can reasonable be provided here. I suggest you talk with an account. Once the mess is cleared up, you should be able to move forward.

If you hand the check to him or mail the check to his address, it is no longer your worry. How they do their finances is up to them. How they file taxes is up to them. You just need to worry about the business.

[tallen]

Andrew, I want to clear up one thing -- there are two different types of payments that might be made to the owner. I see you using the word "salary" but I am not sure you are understanding what it really means in this context.

When they (the accounting references you've looked at) say that the owner of the corporation must receive a salary (if he is providing services to the business), what they mean is that the owner must be treated as an employee and the salary he receives is the compensation for the services he is providing to the business. Since he is now an employee of the corporation, the business must withhold federal (and state?) income taxes and deduct social security and medicare, and must pay it's share of social security and medicare as well as unemployment and worker's comp insurances. This is all done through a payroll process -- the same payroll process that you would use for the other employees of the business. These payments would be charged to the appropriate "wages and salaries" expense account.

If you are not running the payments to the owner through payroll, then they are the second type of payment -- an owner's draw, or distribution -- regardless of whether you are calling it "salary" or not. These payments involve owner's equity, not an expense account.

The owner can receive both types of payments from the business. The IRS says that an owner who works in the business just has to receive a reasonable salary (or wage, run through payroll process) first before taking any distributions (this is because there are certain tax advantages to taking distributions rather than wages or salary, and they want to make sure that all the appropriate taxes are being paid).

If the owner is no longer involved in the day to day operations of the business, does not work for or in the business anymore, then he does not need to be paid a salary (or wage, run through payroll) and instead all payments can be in the form of distributions.

As far as the wife goes, if she is not a shareholder in the business (or "member" of the LLC), and does not work for the business, then the checks should not be made payable to her. If the checks are payable to the owner, but she is the one who picks them up, that is fine and not a concern. How they handle their personal money is up to them.

Hope this helps clarify things.....

(I remember your posts from a year to two ago; sounds like some progress is being made. Good Luck!)

[xandrew245x]

Thank you tallen that really cleared it up. So at this point it will be fine to just continue paying him with owner draw, but have the checks wrote out to him and marked in quick books that they are going to him

[xandrew245x]

I talked to an accountant today and got it all straightened out, however I did forget to ask one thing. The owners wife for the first couple months of last year would take some of the checks of invoices that were paid, so now I have invoices marked as paid in quickbooks, but now that i'm reconciling last year, what am I going to match those transactions with. They were never deposited in our bank, so I am going to have quite a few that were never match up once I reach the end of the year.

[nealrm]

Make a cash account and deposit the checks into it. Then do owner withdraws from that account in the same amounts.