Tax planning and asset protection are two of the factors that must be considered when you transfer any assets from your personal ownership to your LLC.
A limited liability corporation, or LLC, is a separate legal entity and offers its owners some degree of personal financial protection. Many small businesses start as a sole proprietorship, and after attaining some degree of success, the owner changes the structure to an LLC to gain some tax benefits and asset protection.
When switching the business structure, it will be necessary to transfer ownership of some assets from your sole proprietorship to the limited liability company. Any transfer needs to be properly documented to maximize the tax benefits.
Transferring Low Value Assets
Anything that is used in the business should be owned by the business. When you first set up the LLC, you should make a list of all property that is to be transferred. Those items can then be considered as a tax free capital contribution or they can be sold to the LLC. You could be liable for personal taxes that might be due on any item transferred in a sale.
A bill of sale should be completed, and funds moved from the LLC to your personal account for anything transferred in this way. If you had used the property for business purposes, personal income taxes could be due on any amount that is paid above the cost basis. Depreciation must be considered when calculating your cost basis. If an asset has been completely depreciated, the full amount paid by the LLC could be taxable income. After the sale is completed, assets will be depreciated by the LLC based upon the new cost basis established in the bill of sale.
A capital contribution of the assets to the new LLC is considered a tax free exchange, and can be recorded simply with a corporate resolution noting the transfer. This is a simpler approach. Future depreciation would be taken based on the stated value of the asset when transferred and no new basis calculations are needed.
Transferring High Value Assets
Cars, trucks, or real estate can also be transferred to an LLC. This will require physically transferring the title with the proper legal authorities. There may be expenses and considerable paperwork associated with this. After transfer, the LLC has full liability for the asset, which can be an advantage to the business owner.
If an asset is still financed, for example, there is still a balance due on a car loan or a mortgage, you cannot transfer ownership without the approval of the bank. If the bank approves the transfer, the LLC will be able to build a credit history faster. You should use a credit monitoring service such as CreditBuilderTM from Dun & Bradstreet, to ensure that the payments are being properly reported.
An LLC offers several advantages to business owners, and setting one up can be a relatively straightforward process. Transferring assets does have tax consequences, which could mean tax benefits are available with proper planning.