What Can an LLC Spend Money On?
A limited liability company (LLC) is a business that may run like a corporation but, in many ways, is treated like a proprietorship. The treatment of an LLC can be very different depending on what perspective is applied. The tax view aligns closer to a sole proprietor, while the legal view markets as more similar to a partnership or regular corporation for legal protections. These perspectives dictate the categories of allowable LLC expenses.
Other People Are Reading
-
The Purpose of an LLC
-
As a legal approach for a business, the LLC designation establishes the business as a separate entity from the personal legal status of its owners. LLCs can either have partnerships of a number of owners or they can have just one owner. The purpose tends to be legal in nature to protect personal assets of owners from any liabilities the business may incur. For instance if a contract goes sour and the contracting party sues the business, the lawsuit against an LLC would be limited to the LLC assets, not the personal bank accounts of the owner (at least that's the legal expectation).
The protection purpose does not always occur. Many times courts will "pierce the corporate veil" to find owners responsible for fraud, malice or irresponsible actions that showed intent to harm another party.
Tax Treatment: Sole Owner
-
LLCs run by one owner generally get treated as sole proprietorships by the Internal Revenue Service. Regardless of the legal status, the IRS wants these businesses reported on the individual's Schedule C attachment to personal income tax forms. This means that LLC expenses an owner desires to claim for tax liability reductions must meet the IRS allowable categories. Not every expense incurred will be allowed as a write-off against business income earned.
-
Tax Treatment: Partnership Owners
-
If the LLC includes a number of partners, then the expenses allowed to be used for deductions are declared on a Schedule E for an individual's tax forms. The individual can claim those expenses that the partnership agreement specifies are required of each partner.
The LLC itself functions as a full business entity and reports its own income taxes as a legal entity. It reports taxes on Form 1120 Corporate Tax Return rather than through the individual owners. Expenses reported for reduction of tax liability are defined by the IRS as they pertain to corporations, not individuals.
Practical Business Expenses
-
If the LLC runs under one owner, as a sole proprietorship, then the allowable business expenses are whatever the business owner wants to expend, within the laws of the jurisdiction the business operates in.
If, on the other hand, the LLC runs under a partnership of multiple owners, then allowable expenses depend on how the partnership agreement is defined. Certain expenditures may be off-limits or, more commonly, may require majority vote or group consensus among partners before being spent. The details would depend on the given partnership and can vary from business to business. Again, anything the business spends is constrained by the federal, state and municipal laws for the area the business functions in.
Public LLCs
-
Generally, when an LLC has shareholders beyond just the owning partners, the shareholders have a say on big expenditures. And, if the shareholders do not like where the business owners are going, a shareholder lawsuit can be initiated to force a different behavior or obtain compensation for harm caused. A shareholder taking such a conflicting approach would need to show proof of ownership and detail exactly how the partnership intentionally damaged the interests of the shareholder filing the complaint.
-
References
Resources
- Photo Credit corporate worker outside image by Gina Smith from Fotolia.com
