Capital Stock - LLCs

[Snaggletooth]

When an LLC is formed, my observation is that the inception paperwork is much less structured than a corporation. In my state, for example, there is no mention of quantities of stock shares, stated value, par value. No stock "certificates" etc.

The bizarre Tennessee Hall Tax creates triple taxation if a single-owner LLC fails to follow up and check the box for a corporation.

Yet, if the LLC becomes a corporation (either C corp or S corp doesn't matter), there is a requirement to report capital stock on the balance sheet. So there is an opportunity for one to report whatever they wish, at least ostensibly.

But that makes a tremendous difference. Assume Mortimer starts his LLC with $100,000 in cash. We know that at some point, some of this will be returned to him. We can report the entire $100,000 as capital stock on the balance sheet. If that happens, any money coming back to him will be dividends. At the other extreme, we can book $1000 in capital stock, and $99,000 as a "loan." Then when he takes money out he is only repaying himself the "loan."

I know the IRS can show up and override by declaring as capital stock whatever they think is "reasonable."

How can we determine for ourselves what is "reasonable?" Anything in the code or regs? Or would it only be found in the IRS audit guide??

[ChEAr$]

LLC capital

When an LLC is formed, my observation is that the inception paperwork is much less structured than a corporation. In my state, for example, there is no mention of quantities of stock shares, stated value, par value. No stock "certificates" etc.

The bizarre Tennessee Hall Tax creates triple taxation if a single-owner LLC fails to follow up and check the box for a corporation.

Yet, if the LLC becomes a corporation (either C corp or S corp doesn't matter), there is a requirement to report capital stock on the balance sheet. So there is an opportunity for one to report whatever they wish, at least ostensibly.

But that makes a tremendous difference. Assume Mortimer starts his LLC with $100,000 in cash. We know that at some point, some of this will be returned to him. We can report the entire $100,000 as capital stock on the balance sheet. If that happens, any money coming back to him will be dividends. At the other extreme, we can book $1000 in capital stock, and $99,000 as a "loan." Then when he takes money out he is only repaying himself the "loan."

I know the IRS can show up and override by declaring as capital stock whatever they think is "reasonable."

How can we determine for ourselves what is "reasonable?" Anything in the code or regs? Or would it only be found in the IRS audit guide??

Since an LLC has members, and member(s) contribute capital to the organization,
and since an LLC is NOT a corporation (regardless of any federal election to be taxed
as one), it follows that the word Capital Stock is not the way to describe members'
capital.

Therefore even on 1120's for an LLC, I place a zero value for capital stock, but use
Additional paid in capital for members' capital.

[Nashville]

Good Answer, but...

Good answer Harlan, but still doesn't address how you might allocate initial contribution to capital versus loan.

Capital, whether in capital stock or paid-in capital, bears the same with respect to repaying a loan, liquidating dividends, or any complexion.

If a client contributes an initial $100,000 to his LLC, can he allocate the whole thing to a loan? Or half of it? Or none of it? This is the essence of the question.

Appreciate your response - thanks for taking the time to reflect on this.

[BHoffman]

Piercing the Corporate Veil

I think you can split it up or book it all to one or the other for Fed tax purposes, but might run into legal liability issues if the company is undercapitalized. Of course, every State has it's own set of rules.

[ChEAr$]

I ask you......

I think you can split it up or book it all to one or the other for Fed tax purposes, but might run into legal liability issues if the company is undercapitalized. Of course, every State has it's own set of rules.

Just how can an LLC be undercapitalized?

[ChEAr$]

You don't.

Good answer Harlan, but still doesn't address how you might allocate initial contribution to capital versus loan.

Capital, whether in capital stock or paid-in capital, bears the same with respect to repaying a loan, liquidating dividends, or any complexion.

If a client contributes an initial $100,000 to his LLC, can he allocate the whole thing to a loan? Or half of it? Or none of it? This is the essence of the question.

Appreciate your response - thanks for taking the time to reflect on this.

allocate anything. You look to the operating agreement to see what is called for.

In the absence of anything I would first allocate all initial "contributions" to members'
capital. Then any subsequent additions confer with members to determine what it
actually is.

In my favorite LLC, there are three: 50/25/25. Each put up 1,000 per share, total
100,000. Subsequently # 2 lent the LLC as needed, so the books naturally show a
loan payable to him.

Remember to dot the i's and cross the t's.

[BHoffman]

Undercapitalized LLC

http://www.citmedialaw.org/legal-guide/piercing-corporate-veil

The link above is where I got the notion of an undercapitalized LLC. I think it's possible for the members to lose their liability protection. This seems like a legal question, and I'm no attorney so I'll bow out of this one