Sole Prop to S-corp, liabilities

[mbigelow]

My last post about an S-corp received ZERO responses; I'm hoping for more than that with this one! Family-run company operated as sole prop by father for many years. At some point several years back, his son, who also works for the business, loaned the business some funds, which they showed on their company balance sheet and GL but have never paid back. Last year, the company incorporated (S-corp election made) with the father as the sole shareholder. After incorporation, the son loaned the company funds to purchase equipment. I'm fine with putting the second loan on the books, but unsure about the first, long standing one. Does this just become a personal matter between father-son? It gets messier b/c I sense that the son wants in on the corp and wants to trade the liabilities in for shares and a percentage of profits. Any input if much appreciated. Thank you.

[kathyc2]

My last post about an S-corp received ZERO responses; I'm hoping for more than that with this one! Family-run company operated as sole prop by father for many years. At some point several years back, his son, who also works for the business, loaned the business some funds, which they showed on their company balance sheet and GL but have never paid back. Last year, the company incorporated (S-corp election made) with the father as the sole shareholder. After incorporation, the son loaned the company funds to purchase equipment. I'm fine with putting the second loan on the books, but unsure about the first, long standing one. Does this just become a personal matter between father-son? It gets messier b/c I sense that the son wants in on the corp and wants to trade the liabilities in for shares and a percentage of profits. Any input if much appreciated. Thank you.

If it was NOT a LLC sole-proprietor, the first loan was a loan or gift to the father, not the company. If the first company was a SMLLC there may be a way to have Corp recognize loan IF the loan had a contract AND the purchase agreement between the LLC and the Corp included it.

[mbigelow]

If it was NOT a LLC sole-proprietor, the first loan was a loan or gift to the father, not the company. If the first company was a SMLLC there may be a way to have Corp recognize loan IF the loan had a contract AND the purchase agreement between the LLC and the Corp included it.

Thank you, Kathy. The business was previously run as a sole proprietorship filing on a Schedule C. I'm inclined to agree that the "loan" was really a gift by the son, especially because, as far as I know, no repayments have ever been made. Any other thoughts are greatly appreciated.

[Roland Slugg]

I'm inclined to agree that the "loan" was really a gift by the son, especially because, as far as I know, no repayments have ever been made.

So, you're going to assume that the loan was a gift from son to father based on one person's reply on this forum?

Why don't you ASK the son ... and his father ... about that?

The fact that the transaction was recorded on the company's books and is also shown on its balance sheet is highly suggestive, prima-facie evidence that it is regarded as a bona fide loan to the business.

Regarding the distinction in the previous post between an LLC or a non-LLC I don't see how that has any relevance ... whatsoever.

I also suggest that you read Code §357(a) (b) and (c).

[kathyc2]

The difference is that a LLC is a legal and separate entity from the one member operator. A loan to a non-LLC SP is just a loan to the person, as the business has no separate identity from the owner. Just because a SMLLC and a SP receive the same tax treatment, they are legally different, which is what the point of an LLC is.

[mbigelow]

There are other factors that suggest this may not be a legitimate loan. Please rest assured that I would never simply use one response on a discussion board to inform my tax preparation. I'm simply trying to round up all considerations and wanted to use this Forum for some food for thought without giving a whole dissertation on the history of the transaction in question. While I appreciate all responses, I don't think anyone likes being condescended toward. Can we keep it cordial as we all try to make it through tax season?

[kathyc2]

There are other factors that suggest this may not be a legitimate loan. Please rest assured that I would never simply use one response on a discussion board to inform my tax preparation. I'm simply trying to round up all considerations and wanted to use this Forum for some food for thought without giving a whole dissertation on the history of the transaction in question. While I appreciate all responses, I don't think anyone likes being condescended toward. Can we keep it cordial as we all try to make it through tax season?

It doesn't sound like it's a legit liability of the corp, but even if it was what would your offsetting debit be to record it? Seems like it would need to be to an equity account.