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  1. #1
    Join Date
    Jul 2011
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    24

    Default Can You Sell Equipment to a LLC That You Control

    My question involves business law in the state of: CA

    I recently formed an LLC (1 owner) and Im in the process of purchasing some equipment. Since the LLC is new, most banks are reluctant to give the LLC a loan.

    Fortunately I have excellent credit and have access to some cash with a creditor.

    Question is: Can I purchase the equipment ($5,000) personally, then sell this to the LLC (ie. write a check). Would this be legal? Im trying not to comingle accounts, but this would be the most feasible for me.

    I know I can personally co-sign for a business loan on behalf of the LLC, but the entire loan process is quite grueling and will take 8 weeks with my bank. My concern here is time, since I already have clients ready to hire me on.

  2. #2
    Join Date
    Mar 2013
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    18,340

    Default Re: Can You Sell Equipment to a LLC That You Control

    No, there's nothing illegal (or even wrong) about the LLC paying you for the equipment.

    However, if the equipment is the security for the loan of the money you are getting now, then you'd better read the loan contract and make sure there isn't any "due on sale" clause or some other provision mandating that ownership of the equipment remain in the name of the borrower.

    On the other hand if the loan is just your personal credit line that already exists (like a credit card, home equity line of credit, or signature line of credit) then you are free to do what you like with the equipment.

    If all you are concerned with is the tax deduction (either depreciation or Section 179) then you shouldn't even have to "sell" it to the LLC since the LLC is a disregarded entity for income tax purposes and you can just put the receipt with your business records and show it on the business sections of your tax return along with other deductible items.

    I think I'm right about that last paragraph but there is a tax attorney who volunteers here who will shed more light on it if necessary.

  3. #3
    Join Date
    Jul 2011
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    Default Re: Can You Sell Equipment to a LLC That You Control

    Thanks adjusterjack, glad to hear my idea wasn't too absurd.

    That's correct, the loan would be in a form of a personal credit card (in unsecured loan) that I would use to purchase the equipment on behalf of the LLC. I know this isnt the ideal solution, but its only temporary until I build up a credit history with the LLC.

    Another thought I had would be get the loan (again, from my personal cc) then make a 'contribution' to the LLC for the purchase. I think this would be the "cleanest" way to do it, in terms of accounting, paperwork, etc. I just dont want to prevent any type of 'comingling' if the IRS ever comes knocking on my door.

    I do plan on writing this off as a business expense.


    Thanks for your input.

  4. #4
    Join Date
    Oct 2014
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    8,238

    Default Re: Can You Sell Equipment to a LLC That You Control

    There are several ways to do this. You can have the LLC buy the equipment and obtain the loan from the bank with you acting as guarantor of the loan for the LLC. You can borrow the money personally, contribute the cash to the LLC, and the LLC buys the equipment. You can borrow the money personally, buy the equipment, and contribute the the equipment to the LLC. You can borrow the money, buy the equipment personally, and have the LLC buy the equipment from you. Assuming that the LLC is organized in the U.S. and you have not elected with the IRS for the LLC to be treated as a corporation then under federal tax law the one member LLC is disregarded as an entity separate from its owner. In more plain English, the IRS treats that LLC as though it did not exist and that the business is simply a sole proprietorship operated by you directly. That being the case, for federal tax purposes all those transactions I just listed will be viewed very simply this way: you are borrowing the money to buy equipment for your sole proprietorship business. So from an income tax standpoint it doesn’t matter which of these you choose.

    But outside of the tax world, those transactions are each a bit different. You can choose to use any of them, but if you want to ensure that some creditor of the LLC won’t successfully claim that you haven’t respected the separate existence of the LLC and thus be able to pierce the corporate veil and hold you personally liable for the LLC debts you will want to be sure to follow the necessary formalities for the particular transaction you choose. For example, if you borrow the money personally and buy the equipment yourself and then contribute that equipment to the LLC, to do it right you would have a written contribution agreement executed between you and the LLC. You might want to discuss with a business attorney the kinds of formal things you need to do when running the LLC to ensure that its separate existence will be recognized and respected.

  5. #5
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    Jul 2011
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    Default Re: Can You Sell Equipment to a LLC That You Control

    Hi Taxing Matter, thank you so much for the detailed information!!

  6. #6
    Join Date
    Jul 2015
    Location
    Florida
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    301

    Default Re: Can You Sell Equipment to a LLC That You Control

    Many banks (Chase for sure) are happy to issue a credit card to the business if you personally guarantee it. The credit is reported under the FEIN of the business, not your SS#, and the business builds a credit history on that basis. That might serve both your immediate need for the equipment as well as your long term goal of building the business' credit rating.

  7. #7
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    Nov 2013
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    Default Re: Can You Sell Equipment to a LLC That You Control

    The one consideration that I have not seen addressed in this thread yet is depreciation of the equipment. I don't know the value of it or if it can be written off in one tax year, but if it is a substantial investment, you may want to have it depreciated.

  8. #8
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    Oct 2014
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    Default Re: Can You Sell Equipment to a LLC That You Control

    Quote Quoting budwad
    View Post
    The one consideration that I have not seen addressed in this thread yet is depreciation of the equipment. I don't know the value of it or if it can be written off in one tax year, but if it is a substantial investment, you may want to have it depreciated.
    It may be possible to elect to deduct the full cost in the year of purchase under Internal Revenue Code (IRC) section 179. Otherwise, generally equipment is depreciated. The rules for this can get a bit complex, but both the § 179 deduction and depreciation are discussed in detail in IRS Publication 946.

  9. #9
    Join Date
    Jul 2015
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    Florida
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    Default Re: Can You Sell Equipment to a LLC That You Control

    New businesses aren't typically very profitable, and there are options all the way from straight line (i.e. the slowest possible) depreciation up to full expensing under section 179. That's beyond the scope here, but certainly worth discussing with a competent tax advisor. Planning is key to maximizing the tax benefit of capital investments. Every taxpayer needs individualized advice in this regard.

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