Transitioning from Sole Proprietorship to Single Member LLC

[srw]

I just formed a single member LLC to provide consulting services at the beginning of March. In November of last year, I entered into a consulting agreement to help a company create certain documentation. The agreement provides for three equal payments to be made based on completion of defined milestones. The first payment was received in January of this year. The next two payments are still to come. Can I transfer the consulting agreement to the LLC as an asset so that the remaining two payments become income to the LLC? What about the payment that was received prior to the LLC formation? If I cannot make such transfers, do I then need to fill out two Schedule Cs when I file my taxes next year, one for a Sole Proprietorship and another for the LLC (assuming I have other income to report for the LLC)?

I have a similar question relating to business expenses. I have travel and living (T&L) costs associated with attending a week-long meeting related to the consulting work in February prior to formation of the LLC. I expect to have additional expenses for attending other meetings later in the year as well as the costs for things like the LLC filing fee and office supplies. Can the T&L costs for the February meeting (about $1500) be transferred to the LLC?

If I cannot transfer the two remaining consulting agreement payments to the LLC, and if I fail to land any other contracts that would provide income for the LLC, would I be better off not charging the T&L expenses to be incurred later in the year to the LLC? That is, should they be charged as expenses to the Sole Proprietorship?

[vangogh]

Welcome to the forum srw. I'm sorry no one responded to your question. Sometimes they slip through.

This isn't my area of expertise, but I'll try my best. I'm not entirely following though. You mention only receiving one payment so far which was in January of 2013. If you formed the LLC in November 2012, I'm not sure what payment you're referring to before the LLC formed.

Since you were a sole proprietor for nearly all of last year and it doesn't seem like you received any payments to the LLC last year, I would think that simplifies filing. I would think for this year's filing everything you do will be as a sole proprietor, which I assume is how you've been doing things up until now.

Since the LLC was formed before there were any payments made (am I following that right?) then I wouldn't think there's anything to transfer. If I am wrong about the dates I would think you could transfer the agreement in some way. Maybe the money has to go into the sole proprietorship, which then finances the LLC.

Hopefully someone who can answer better will see the thread now and provide a better response.

[srw]

My thanks to vangogh for attempting to answer, but apparently I need to be a little more clear in my statement of the issue. I formed the LLC in March 2013. I entered into a consulting agreement as a Sole Proprietor in November 2012. I received the first of three payments due under that sole proprietor consulting agreement in January 2013.

The question is whether I can transfer that consulting agreement to the LLC so that the two payments still to come on it are income to the LLC. Also, what, if anything can/should I do with the first payment. I know that I can make it a capital contribution to the LLC, but is there anything besides that?

Thanks!

[Freelancier]

You can transfer that agreement only to the extent that the agreement can be transferred. In other words, unless there's something in the agreement allowing for you to assign or transfer the agreement to another entity for completion, you may not be able to transfer it.

BUT... why not just talk to the customer and explain the situation and ask to either re-work the agreement (e.g., a one-page addendum transferring your part of the agreement to the LLC) or just to allow you to bill them from the LLC going forward?

Either way: single-person LLCs are considered disregarded entities by the IRS, so you'd end up filing a Sched C for that income regardless of whether you transfer it. The only thing the LLC buys you is liability protections in this case, not a change of taxation.

[vangogh]

My bad. I did misunderstand. It's what happens when I try to respond when I'm tired.

Now that I do have a better grasp of what you're asking I agree with what Freelancier said above. I'll also ask if you have an accountant. Seems like the kind of question perfect for an accountant or perhaps an attorney. If you know either I'd ask them. If not we have some members here in both groups, though they aren't usually here every day.

[srw]

Thanks for the replies. I will do as freelancer suggested and see if the other party is amenable to a change in the agreement to allow me to bill them from the LLC.

[vangogh]

Good luck. I would think they'd be fine with that since it's still you doing the work. Let us know how it works out.