Work Smart

A personal residence should never be transferred to a business entity. Doing so will result in the loss of the homestead exemption.

Further, the small business owner should consider personally owning certain "tools of the trade," including a personal automobile, office equipment and furniture, and then leasing these assets to the business entity. This also ensures that the exemption for this category of assets will continue to be available to the owner. Of course, such arrangements must be properly authorized by the entity, and in the form of a written agreement between the owner and the entity.

John Smith, sole owner a limited liability company (LLC), uses his personally owned automobile for both personal and business purposes. He records the automobile's mileage at the beginning and end of the year. In one year, he drives 18,000 miles. His log shows he drove 12,000 business miles. This represents two-thirds of the automobile's total usage.

Smith should pay the general operating costs for the vehicle from his personal accounts, because he owns the vehicle personally. Smith should form a written agreement with the LLC, wherein the LLC will reimburse Smith for two-thirds of all operating expenses associated with the vehicle. This can be done on a weekly, biweekly or monthly basis.

If Smith incurs an expense solely attributable to business usage (e.g., a parking fee or toll on a business trip), this expense should be paid directly from the business's accounts.

Note that the objective here is the separation of the owner's and the entity's financial affairs, so as to prevent an application of the alter ego theory. However, keep in mind that, although tax planning is not the objective here, for tax purposes, a one-owner LLC is a "disregarded entity." Thus, for tax purposes, reimbursement from the entity serves no purpose. For tax purposes, the owner and the entity are one and the same.