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Level 2

S-corp stock sale with seller financing and how to handle long term liability and owner equity when payments are made

Working with an S-crop business. QB file started in 2017 by owners A and B.

 

On 1/1/2020, owner A sold their shares to owners C and D via seller financing.  This was not an asset sale but rather a stock sale. 

 

In the same QB file, a long term liability was created for the principal amount owed to owner A. This amount also created an entry in Opening Balance Equity. This amount was switched to another equity account that I created called Shareholder Equity because I know OBE always needs to be zero. 

 

The Shareholder Equity account is now very negative. Is this normal and correct?

 

How will the Shareholder Equity account ever get positive again? The amount owed in the long term liability account is reduced with each principal and interest payment (as expected) but the large negative amount in Shareholder Equity is unchanged.  Should I make some kind of journal entry to deal with this? 

 

Thank you for any help!

2 Comments
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Community Champion

S-corp stock sale with seller financing and how to handle long term liability and owner equity when payments are made

Owner A did not sell his stock back to the S corp, only outside the S corp and thus the seller financing is also outside the company.. Residual owners B and C have  personal loans payable to former owner A. If for convenience the loans are repaid from company profits these are in fact deducted from pass through distributions.

 

In the company books there is no change in total stock value or equity (after any adjustments per the 2019 1120S) and so it is a simple transfer of equity from one owner to the other 2.

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Level 2

S-corp stock sale with seller financing and how to handle long term liability and owner equity when payments are made

@john-pero, thank you for your help, what you said makes sense and helps me wrap my head around it all.

 

Yes, owners C and D are making payments from the company to former owner A. How do we actually deduct the payments from pass-through distributions (ie: what steps in QB do we take and when, journal entries, etc.)?

 

We had set up a long term liability and have been making payments via check that have reduced this liability balance. Should we keep this long term liability in place or should we have not set it up at all?

 

You said there would be no change to equity…based on what we have done so far there is a change in equity. How do we correct this?

 

I guess an easier question is how should all this be set up and processed in QB if we were to do all this over again and start fresh tomorrow?

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