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Level 2

Paid off owners debt from previous entity write off?

I took over a company last fall.  One partner of the business embezeled (a LOT!) causing the split and company restructuring.   One of the debts left over was a business credit card account but linked to the remaining owners SSN.   I just paid off $13k of the old companies CC debt.  Does this go under owner draw or uncollectable bad debt since it was the scumbag who took the money (Mostly cash advances on the card).  The two businesses are completely separate entities.   Everything in the new company was started from scratch.    Thanks!   


I've been wrestling with this for about a month and cant seem to find any answers.

Level 7

Re: Paid off owners debt from previous entity write off?

Wow, @HoZr - that is a crazy story! I can only imagine how much time and effort it has taken you to untangle all these threads. 


@Rustler, do you have any ideas here? It's a thorny one.


@HoZr I'd love to know more about the kind of company you took over and what inspired you to jump in when you did. What motivated you to take on this challenge and, about a year in, are things turning out the way you expected?

Level 15

Re: Paid off owners debt from previous entity write off?

The scumbag should not be listed as a partner in the new business, so it could not post to scumbag drawing.

(now that made me smile)


I would create and use an expense account called embezzlement expense. While it is bad debt, bad debt is usually associated with customer invoices. And having it separate on the P&L makes the hit to net profit more understandable.

Level 2

Re: Paid off owners debt from previous entity write off?

This is a towing and Recovery Company and this story is well, long and crazy.    A close friend of mine got into business with an acquaintance of his.  The acquaintance (Scumbag) was already in the industry and was looking to branch out on his own.   Scumbag talked a good game but there was always something a little off.   


About 2 months into the Partnership I was asked to help out because they were just "too Busy" and things critical items were being missed.   During the talk of me joining (as a partner) I did my due diligence.  The Credit card account was overdrawn, $17k on a $13k credit limit.  The bank accounts were drained.  No payments were being made on anything.  AR was not being processed so money was left on the table.  The corporate structure, or I should say general partnership, was never completed correctly.  No Work Comp, no payroll taxes, no sales tax remittance, nothing was legit.


Basically scumbag was taking every single cent right back out.   When the bank account would look low he would swipe the company credit card through square as a deposit basically making a cash advance at 4.5%.


Withdrawals were mostly in cash at casinos, etc.  He bought himself a car, wasn't paying employees,  bought some guns, bought a first class ticket to Ohio to see his friends and rack up $3k at a strip club and hotels/bars.   Basically a nightmare and all in under 60 days.   

The kicker was finding $15k in forged checks (he left them behind and we have them) from the other partners retirement investment account.  He had stolen the checks and forged them then made mobile deposits to his own account.  He also opened 2 more credit cards in the other partners name/ssn.  All told he did $75-100K in less than 2 months.    


I had to help my friend out so I shut EVERYTHING down.   Reformed the corporation as a LLC, re-established all new accounts, new lines of credit, paid off all the old debts (the 13k CC was the final old debt) and have been rebuilding since.


The sheriff will do nothing, the DA will do nothing, the banks have done nothing, even our lawyer is pretty much giving up now because scumbag is completely broke and HIS lawyer dropped him.  They could toss him in jail but because he's a non-violent offender and  they would just have to let him back out.  All the folks out there who say they have your back will in the end do nothing when pressed.    Wells Fargo's fraud prevention department is an absolute joke.  


The new LLC is  currently net 100k on 400k gross.   Everything is above board and legal and now completely free and clear other than operating expenses.  It's been a LONG year....


Thanks for the advice, I'll set up an embezzlement expense and route all the debt payments through that.

Level 2

Re: Paid off owners debt from previous entity write off?

Scumbag is completely out of the picture.  Thanks for the help!!!

Level 7

Re: Paid off owners debt from previous entity write off?

Wow, @HoZr - your friend is EXTREMELY lucky to have you in his corner. It sounds like you arrived on the scene in the mindset to ask the right questions.


I'd say most of our QB Community members start out as sole proprietors and then expand into partnership kicking and dragging their feet. It's a lot to hand over some of the operations for "your baby," and trust is a big issue as well. How do you find the right person? As your story demonstrates, partnering up with someone based on acquaintance alone is not the way to go.


I'd love to know, based on your experience over the past year, what advice you have for folks who are considering bringing on a new partner, or going into a new business with one. What are the key questions to ask (and to ask yourself)?

Level 2

Re: Paid off owners debt from previous entity write off?

Don't!    Partnerships are a nightmare.   Have a corporate structure where one person is in the leadership role and can make decisions.   The subordinates might not like it but it is for the best long term.  If they can't abide the decisions it's probably a good thing they aren't partners!


Seriously though, avoid a general partnership or even a LLP at all costs.   If you need it for money there is money out there.  If you need it for Ideas or IP then make sure the contracts and governance are in place and followed.   Partnerships start with the  best intentions and usually end, well, worse.


The funny thing is I'm not even a partner in the new company!   It's a sole proprietor LLC and I'm the GM with officer(?) status to make corporate decisions.  He could override my decisions if he wanted to.  He usually won't!

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