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Mida Valo
Level 2

Moving debt from company to owner

I'm trying to help a friend with his accounts, and he's done something that I just don't know how to record.

 

He has a few properties on Airbnb.  He set up a LLC to manage those properties, and recorded all income and expenses etc. for the Airbnb business.  Now in one of the houses he had to buy a new furnace, he got a loan (in his name) and recorded it as a loan in the business and then any loan repayments made from the business.

 

Now he has decided to take that property off Airbnb to live in it.  He has taken responsibility for repaying the loan and considers the debt his responsibility now, not the LLCs.

 

Unfortunately, neither he nor I know how to record that shift of debt and repayments to him.  There was 9 months of repayments made by the LLC before he took over the debt.  The LLC never had a property asset recorded (it doesn't own the property, it just managed the airbnb business expenses etc.)

 

I am thinking that the loan should never have been recorded in the business accounts, and that the repayments onto that loan should have been recorded as payments to the owner, however the 9 months of loan payments were made directly to the lender from the LLC's bank.

 

Am I overthinking this?  Or is there a simple, straightforward, normal way to record this kind of transaction?  Or has he made a complex financial problem he's going to have to overcome?

 

Thanks

3 Comments 3
Rainflurry
Level 13

Moving debt from company to owner

@Mida Valo 

 

What is the tax classification of the LLC?  Is it a single-member LLC (essentially a sole proprietorship), partnership or S-corp? 

Mida Valo
Level 2

Moving debt from company to owner

Single-member/sole proprietor.  He just set it up to try to keep his airbnb separate.

Rainflurry
Level 13

Moving debt from company to owner

@Mida Valo 

 

I think you're on the right track.  Since the loan was taken out personally, and not in the name of the LLC, it should have been recorded as 'Owner's Contribution' equity and not a note payable.  And, your point about recording the loan payments as owner's draws sounds right as well.

 

So, to get this loan and the 9 months of payments reclassified, make a journal entry:

  • debit the loan payable for the outstanding balance,
  • debit owner's draw for the total of the principal portion of the payments made over the 9 months
  • credit owner's contribution to balance

 

This will remove the loan, book the payments made to owner's draw and book the full loan amount to owner's contribution.   

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