USA Trouble with new LLC transactions (journal entries)

[GreenWolverine]

Hello all.. I have two questions that I'm trying to understand in relation to LLCs. Any help would be very much appreciated

Scenario: I capitalize a new LLC with $1,000, with 10 shares authorized. I issue 8 to myself immediately, and 6 months afterward, I issue the remaining two to a new employee. We do not make money during the year.

Question 1: Do the 2 shares issued to the new employee count as stock-based compensation and therefore reduce my equity through a net loss?

Question 2: How do I account for the services I've already performed prior to starting the business? Do I set up some sort of prepaid expense right off the bat?

 

[MoralesTax]

Hello there! Well as all things tax, it depends. I have answers, but they're likely to yield you with more questions.

First, you could treat newly issued units from the LLC as compensation. The trick is that your new employee must report the units as wage income through payroll (and pay the associated taxes). Do note that this is assuming you're talking about an LLC that elected S-Corp status.

For an LLC taxed as a partnership, your new partner would pick up the units through Guaranteed Payments and pay the associated self-employment taxes. Either way, the effect would be an increase to equity to the LLC, and increase in basis for your new employee.

The hard part here is determining a value of the units. Here is some guidance on this topic.

Second, as for services you have provided to the business, that's not something you can deduct. You cannot simply come up with an arbitrary amount and choose to book it as a prepaid expense. It is not correct. You would have to pay yourself, in form of a salary, which would be the equivalency of just not deducting it (since salary would be expense to LLC, but income to you).

Do note, if you spent money prior to starting the business, you can elect to expense up to $5,000 of start-up costs and organizational costs, while amortizing the rest.