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jarnism101
Level 1

Mixed personal spending with business all year and now it's a 2 member LLC so I need to fix this

Hi,

 

I set up an LLC for a software development consulting businesses I started in 2018. I opened a business checking account along with it and started using the debit card for both personal and business expenses (Groceries, lunches, dinners, paying for personal credit cards etc).

I would often transfer money from my personal account to business account when short and continue using it for personal spending. At this stage, there was basically no revenue coming in, so I was spending more than I was making and just depositing more into my account via direct bank transfer from my personal account.  On top of this, I've put business expenses on my personal cards as well.

 

About 4-5 months ago, I picked up a couple of large clients. In doing so, I also added a new partner to an LLC and gave him 15% share of the company. 

 

My Partner is alarmed that I did this and we need to fix this mess up. Not only for audit reasons but because it might deter us from doing business with other large corporations if they see messy accounting.

 

I read that you could technically do this if you're a single member LLC but that is no longer the case.

 

I want to know:

1) Does transferring money from my personal account to my business account mean that I paid back the LLC the money I spent for personal spending or because this was not done via a check it means I was comingling?

2) If it means I was comingling, do I just write a check for say $8000 to cover these expenses and call it good? afterward just withdraw the $8000 as a form of payment to myself? seems a little silly to me that I'd need to do this.

3) How about fringe benefits? I read that you can expense your meals/travel which I would say makes up most of my $8000 I spent on my personal expenses.

4) The credit card payments I made using my business account. These credit cards had business expenses on them. 

5) If indeed it's acceptable to do personal spending on your business account if you're a single member LLC, does that mean I let that slide up until I added a new partner to the company and only repay what I spent on personal spending since that day?


That is all for now, I appreciate your help in advance as this is very stressful and it's hard to get a hold of accountants here who seem like they might be of help. I'm not sure why everyone is so booked up.

2 Comments 2
Pete_Mc
Community Champion

Mixed personal spending with business all year and now it's a 2 member LLC so I need to fix this

Really a question you want your Accountant involved in and possibly they've been making entries already if they've been going over your books Quarterly. So I'd check first with them to see if they have and how they specifically want any new accounts you might need set up/named.  (Have you already talked to them about the new 15% partner, I would have thought they would bring this up as part of the discussion.)

 

But the process, assuming you have entered in all of the Debit Card transactions (manually or w/ Bank Feed) may be a little time consuming, but certainly doable. 

 

If you do not have them, your Accountant is probably going to have you create two Equity Accounts called something simple like Equity Investment and Equity Draw.  (I'm a single owner, but actually I'm pretty sure your Accountant will want Equity Accounts for both of you.)

 

Once you have those accounts you just need to go through and change all the personal payments to the Draw account.  (e.g. Change: Shell  $20.00  Auto Expense to: Shell Oil  $20  Equity Draw)

 

Same would be true for any bank or cash deposits.  You'll just need to link them back to your Equity Investment.

 

Your Accountant will probably need to make some entries to make sure your initial Equity into the company when you started it is shown correctly.

Rustler
Level 15

Mixed personal spending with business all year and now it's a 2 member LLC so I need to fix this

it's not as simple as paying the money back, at least not in the event of an audit, there is no tie between the spending and the deposit.  If you had spent business funds and booked it to a due-from asset account, then you could pay that back and it would pass an audit.

That said you might be able to explain it and maybe the auditor would accept that, then again ...

So basically you need to IMO
create an asset  account called due from name
edit each transaction that was personal and change the account to the due from account
then make your deposit in the amount in the due from account to zero it out and pay back the company

Another option would be to change the transaction account to  equity draw, but I would hesitate to do this since you might drive your equity negative.  Depending on your partnership agreement (you do have a written agreement right? that is registered with the state?) negative equity could be breaking the agreement or impact on your partner share.

 

LLC means nothing in terms of accounting or in terms of IRS income tax returns, if there is more than one of you, then you are either a partnership or you elect to be taxed as an s-corp.

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