Craig asks another question, this time about paying expenses out of a sister company or personal account.
Q's about the do's and don'ts during business set-up of using personal credit cards-then writing a check from the business to pay us back. As long as we write a check from "personal acct" back to the business to cover the "non-business" expendatures is that OK? OK to use our airmiles, personal cc for business purchases and then reimburse ourselves with company check? What is the proper way to loan your new LLC/C-corp money from your personal accounts and then get reimbursed months down the road with interest?
A: First, it's always okay to pay business expenses with a personal credit card and then get reimbursed later from the company. You should prepare an expense report just like you would if you were employed by an unrelated company like IBM. You do have to meet certain rules, as you must have an accountable plan. Talk to your ProVision Tax Coach about this.
It's not okay, however, to pay personal expenses from your company account. The problem is that the IRS looks at this as an abuse and may argue that your company should not be respected as an independent entity. Instead, you should distribute funds to yourself, either as salary or a distribution, and then pay your expenses from your personal account. Remember, that you must always treat your company as a real business, not as a personal bank account. So pay your personal credit card from your personal account and seek reimbursement from the company, not the other way around.
As for the loan to the company, I suggest you do a formal loan agreement between you and the company, specifying an appropriate interest rate and payments terms. The interest rate must be no less than the Applicable Federal Rate for that loan. Contact your ProVision Tax Coach at tc.tempe@provisionwealth.com for more information about the structuring of the loan and the interest rate for the loan.
Warmest regards,
Tom