LLC Application Fee

[JG EA]

Would an LLC application fee go on the balance sheet if it is SMLLC and on Sch C?

[Koss]

LLC Application Fee

Application fee? On the balance sheet?

Sounds like you are talking about a fee that is charged by the secretary of state to file forms that have the effect of establishing, or creating, an LLC.

With respect to the balance sheet, it sounds more like an accounting question than a tax question. But I'll take a crack at it...

Under state law, the LLC is separate from the individual. This is an absolutely fundamental principle, and it is the reason that the business has limited liability. The state law issues associated with an LLC are very different than federal tax law. As you noted in your original post, for federal tax purposes, a single-member LLC is treated as a sole prop.

But it is still a separate legal entity under state law.

Hopefully, your client has established a separate checking account for the business.

But he probably couldn't open the checking account until after he filed the form with the secretary of state, because legally the LLC didn't exist until that form was filed. So the bank would not have been able to open the account before the form was filed.

So he probably had to pay the fee associated with filing the form out of his own personal checking account.

This sort of catch-22 arises with the creation of almost any new business entity--not just an LLC. I just set up a new nonprofit organization, and the same thing happened. I had to pay the filing fee out of my own personal funds, because the organization can't establish a checking account until after the forms are filed, and you can't file the forms unless the fee is paid.

But the fee paid to file the forms and establish the organization should still be considered a valid business expense for the organization itself. This, at least, is my intuitive conclusion. We could spend a lot of time debating whether it should be treated as startup costs, which might have to be amortized or something, but however you treat it, it is an expense that should be paid by the business itself. The person who paid the fee when the form was filed should not have to absorb the expense personally.

I think the question in the original post is:

How do you account for the expense if it was paid before the company even existed?

My answer is simple: The company should issue a check to reimburse the person who paid the fee.

So Bob Q. Taxpayer decides to start an LLC. First he pays the state $140 to establish an LLC, by writing a personal check. Then, once the LLC is established, he applies for an EIN. Then he goes to the bank, with the LLC papers from the state and the EIN letter from the IRS, and he opens a checking account for the LLC. He puts in $1500 of his own money, as a capital contribution to start the business.

The first thing he should do is write a check from the LLC to himself to reimburse himself for the $140 fee that was paid to establish the LLC.

BMK

[Gretel]

Would an LLC application fee go on the balance sheet if it is SMLLC and on Sch C?

This fee is an organizational expense and hence non deductible, doesn't matter if SMLLC or regular LLC.

[Gary2]

This fee is an organizational expense and hence non deductible, doesn't matter if SMLLC or regular LLC.

I don't see why section 709 wouldn't apply to the organizational expenses for a MMLLC, allowing up to $5K deductible.

For a SMLLC, see 1.263(a)-5, specifically paragraphs (a)(6) which includes disregarded entity costs among those that must be capitalized and (d)(3) which excludes de minimis costs from the capitalization rule.

[S T]

Organizational

I agree with Gretel in that it is an Organizational Cost (on startup) and then I agree with Gary that it could be under the election for Deduction/ or Amortization. See TTB Business Tab 8 pg 17/18

JG if asking for how to enter on the Accounting - I usually set up an Asset for Organizational and Startup and place the amount there, and then if deducted under the Org and Startup Rules make that Journal Entry to offset. Then it is on the Balance Sheet and also on the P & L

Sandy

[JG EA]

Thanks! I was thinking it was an organizational cost, but I got a lot of good advice that I needed. Thanks all.

[ChEAr$]

As to the accounting part of the question, if an LLC member or corporate stockholder has paid some of these organizational expenses, a simply general journal entry may account for this as payment of capital stock.

e.g. organizational expenses of $ 400 and with a minimum of $500 common stock to be issued, he would then write a check to the corporation for the difference.

GJ entry:

Cash 100
Organzational expense 400
Common stock 500

Oops, got off track thinking of corporations.

the credit for an LLC would be to "Member's equity", something like that.