An LLC protects its owner because it's a separate legal person with its own money. That protection doesn't come from the articles; it comes from how you run the company. If you pay for groceries with the business card and cover the hosting bill from your personal account, a court may decide the company isn't really separate at all. Keeping the money apart isn't hard, and here's how.
Why it matters
- The liability shield. When someone sues the company, they may ask the court to look past it to you. What they look for is mixed money, missing records and no operating agreement. Separate accounts are your first defence.
- Form 5472. Every transfer between you and the company is a reportable transaction. With separate accounts, the form is a list of transfers from a statement. Without them, you have to reconstruct the year.
- Your accountant, who has to work out what the company earned and what you took. Separate accounts make that quick.
Contributions and distributions
Money you put into the company is a capital contribution: the state fee you paid, the first month of software, the deposit that opened the account. Money the company pays you is a distribution: your share of the profit, taken when the operating agreement allows. The owner of a single-member LLC doesn't take a salary and isn't the company's employee; they take distributions. Record each one as what it is, on the day it happens.
How to do it
- Open the company's account before the first sale. Until then, keep receipts for what you pay personally, and record them as contributions on the day the account opens.
- Pay every company cost from the company's account or card: software, contractors, fees and the state's yearly charge.
- Pay yourself by transfer from the company account to your personal account, labelled as a distribution, as often as suits you.
- Never pay a personal cost from the company account. If it happens, record it as a distribution the same day.
- Never take company income into a personal account. If a client pays you personally by mistake, move the money to the company and note why.
- Keep the operating agreement signed and the records up to date, which shows the company is run as a company.
If the early costs went on a personal card
That's true for most founders, and it's fixable in one sitting. List what you paid for the company, from which account and on what date, record the total as a capital contribution on the day the company account opened, and keep the receipts. Do it now, while the statements are easy to find, rather than in April when Form 5472 asks.
With two owners
The same rules apply, with the operating agreement deciding how distributions are split. They follow ownership unless the agreement says otherwise, and each member's contributions and distributions are recorded. A partnership's Form 1065 reports each member's capital account, which is exactly that record.