A single member LLC owned by John began business in 2018 and converted to a partnership in 2020. Jane loaned money to the company then converted the loan to equity in 2020. In order to cover his living expenses while getting the business off the ground, John had withdrawn more than he had contributed thanks to Jane’s loan and SBA loans, and some retained earnings both in prior years and during 2020. John wants to reclassify his distributions to an asset or expense account for presentation to lenders without creating adverse tax consequences.
I see the following possibilities. Are there other alternatives?
1. Reclassify the distributions as loan due from the partner
2. Take compensation (guaranteed payments)
3. Other possible asset for GAAP purposes?