Transferring $ from LLC to Personal account

Question

So I have done some searching here but have not found a question that summarizes my specific position, so I decided to ask it here. I apologize if it has indeed been asked before. Just point me in the right direction and mods can delete.

I created an LLC for my Dad's business. He does all of the business but it is in my name using my SSN and all that (long story). He does all the operations and handles the taxes and everything. I literally never touch it outside of renewing the license with the state every year.

Every once in a while, he will say tell me to take out a chunk for myself whenever we have a trip coming up or it is a birthday or holiday. Something like "hey go ahead and take $200 for your trip this weekend." So I just make the online transfer to my bank account (same bank).

My question is, can I get in legal or tax trouble as it is technically "my business" and am "paying" myself? Do I need to claim this or acknowledge it in my own personal taxes? Even though it is only a handful of times a year and for a sum total of less than $1000? Or am I just worrying over nothing? I have read that because it is a single-entity LLC and the "payments" are being acknowledged on the business tax side, I should be ok in my own personal account and don't need to pay taxes on this again.

Thanks in advance for any replies.

Answer 1

Hoo boy. This is a huge mess. TLDR: There's no tax on the withdrawals (most likely). The bigger issue is paying taxes on the LLC's gains all along.

Here's the problem: It's very unclear whose taxes the LLC passes through onto (if anyone). You say the LLC is in your name, but your father was doing all the paperwork and taxes. If you weren't adding detail to your taxes to accommodate the LLC, that means he's been taking it on his taxes -- or it's been neglected altogether. We need to review the principles of how LLCs work.

Tax Treatment of LLCs

In its simplest form, an LLC is a "disregarded entity" as far as the IRS is concerned. In that configuration you get the liability shield, but with less of the paperwork of a corporation. However that's only one of three possible configurations.

• Unlikeliest first: An LLC that chooses to be taxed like a corporation. It files its very own 1040 (actually 1120) on its very own SSN (actually EIN). This is a mooseload of paperwork; I seriously doubt you did this. If you did, you can't just grab money; you must document it as salary, distribution (think dividend) or loan and then the person receiving it must pay income tax or dividend tax on it, there's your double taxation.
• A Single-Member LLC which elects pass-thru tax treatment. This means the LLC's profits and losses simply get reported as a schedule on your (or whoever the Member is)' personal 1040. IRS disregards the LLC; they don't care what belongs to the LLC vs what belongs to you. You still get the liability shield; that's not IRS's problem.
• A Multiple-Member LLC with pass-thru. Profit and loss still just passes through to the various Members' personal 1040, but it is split amongst the Members in some proportion.

On the pass-thru LLC, the Member(s) must pay taxes when the LLC earns it, not when they withdraw profits. For instance if in 2018 your LLC grossed $40,000 on expenses of $30,000, but it distributed $5000 to Member(s) in 2019.

• The Member(s) should have reported and paid taxes on the $10,000 in 2018.
• Taking it out in 2019, it's not taxed again.

Control of LLCs

LLCs can choose to be Member-Managed, or Manager-Managed. With Manager-managed the Members get no say in the business affairs.

This can create fun tax situations where the Manager makes a lot of profit in 2018, but decides not to distribute any profits to the Members, so they don't have any money to pay the tax with.

I suspect you might have a situation where you're the Member, but your dad is the Manager. But I don't know. You have to look at your paperwork. Every LLC is different.

Why it's OK to take the money now

Presuming this is a Pass-thru LLC:

If you are the Member, then taking the money is simply a distribution. IRS is already disregarding the LLC and treating its assets as your personal assets, so taxes don't need to be paid because they were already paid, right?

If he's the Member, then this is him taking a $200 distribution and then giving it to you as a family member gift. The first $15,000/year of gifts between family members are tax-free.

If you both are Members then it's both happening at once.

If this is a corporate-taxed LLC (why!?) then it's a mess, consult your accountant.

BUT YOU NEED TO (go back and) PAY TAXES

Whoever the Member(s) are, they need to make sure they are paying taxes on the LLC's profits on their personal 1040s. That means somebody needs to go through the accounting books of the LLC and do a "proper accounting" balance sheet and Profit/Loss for the LLC, and figure out what the P/L income and expense is. Then pass that through onto the Members' personal 1040 taxes.

And you need to go back into every previous tax year, forever, and make sure that was done. If you filed your taxes incorrectly, you need to re-compute your taxes again, and file a Form 1040X for each tax year to amend your taxes, then pay the tax and interest.

While you're filing 1040X, also look for any tax deductions you might have missed. You can take those for the last 3 tax years (i.e. for 2016 taxes due April 15 2017, you can amend to claim deductions as late as April 15 2020).

Answer 2

My question is, can I get in legal or tax trouble as it is technically "my business" and am "paying" myself? Do I need to claim this or acknowledge it in my own personal taxes? Even though it is only a handful of times a year and for a sum total of less than $1000? Or am I just worrying over nothing? I have read that because it is a single-entity LLC and the "payments" are being acknowledged on the business tax side, I should be ok in my own personal account and don't need to pay taxes on this again.

If the amount is less than $50 this is typically seen as a rounding error by the IRS, and your state may have a different view. So in this case, you could possibly be in trouble with the amounts.

The test, in this case, is the way the withdrawals are accounted. If they are noted as distributions to owners, then are fine. If you take $2000 out, account for it as a distribution, then put $1000 in, and account for it as an owner investment then you are fine. If you take $200 out for your trip and and say that it was used to purchase equipment, well that is tax fraud regardless of the amount. In the amounts discussed, they would probably only result in a fine if caught.

It's likely that what you are talking about would be 100% on the up and up with the IRS given that you are a single member LLC. The taxes on profits are passed through to you regardless if they sit in the business account or are distributed to the owners. I would just keep good records, and write a check to yourself rather than hitting the ATM and withdrawing cash.

By the same token it is okay for you to own a business where you employ your dad to do the work. Provided, of course, that all the accounting is correct.

Answer 3

I created an LLC for my Dad's business. He does all of the business but it is in my name using my SSN and all that (long story). He does all the operations and handles the taxes and everything. I literally never touch it outside of renewing the license with the state every year.

This statement is troubling. You own the LLC, it is in your name and SSN. That means that you are responsible. You need to review all the documents related to income and expenses, because if there is a tax problem, the government will be looking at you to resolve it.

Knowing how these non-scheduled withdraws impact the corporate and personal taxes for you is the start of the process you need to go through.