By Karen E. Klein Q: I'm a bookkeeper for a couple with a communications business that has been set up as a limited liability company (LLC). All their business and personal accounting is done on QuickBooks. The owner's draw is being shown as a capital withdrawal from the company and a deposit to their personal account, but I am confused as to where I should record the draw on the personal bank account when it is deposited. They do not want to show the wife receiving any income from the company. -- C.A., East Meadow, N.Y.
A: The deposit should be recorded as a distribution of profits, experts say, unless the owner's draw exceeds profits -- which is fairly unlikely. If it did, it would be recorded as a distribution of capital.
You may run into a problem with this small business not showing income to the wife, however. Generally, an LLC with two members is taxed as a partnership, says Timothy W. Mulcahy, a tax partner with Holtz Rubenstein, in Melville, N.Y. That means that both the husband and the wife will be taxed on their share of the income - whether or not it is distributed. "If the wife is, say, a 30% partner or member in the LLC, she's going to report 30% of the company's income regardless of whether they take a draw or not," Mulcahy explains.
OTHER OPTIONS. There are, however, scenarios that could be included in the LLC's operating agreement that would reduce the wife's income to zero. For instance, the agreement could state that the husband gets the first $150,000 in profits from the company annually for his extraordinary contributions to the firm, leaving the wife with zero income assuming they don't generate more profit than that each year. Other amendments could take advantage of an LLC's flexibility to achieve the same result, Mulcahy says.
He recommends that they go back to their attorney and discuss the options in detail before making any changes. "The LLC is very flexible," notes Mulcahy, "but when you get into these arrangements the situation also gets very complicated." Have a question about running your business? Ask our small-business experts. Send us an e-mail at firstname.lastname@example.org, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.