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Experienced Member

New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

 
6 Comments
Established Community Backer ***

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

Source of funds for purchase is shareholder loan, a company liability. Just like borrowing from a bank. Payments are reductions of liability. Once paid back he will have zero equity in his company

Experienced Member

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

Okay I understand the loan aspect. Would I also have an entry for his initial investment aside from the loan?

shreholder investment equity account? What would the JE look like?

Experienced Member

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

Okay I understand the loan concept. What about his investment to begin the business? Would I make a JE to shareholder investment equity account?

Established Community Backer ***

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

Why is the business paying him back?  He should be paying the previous owner from his own funds, no reason for the business to pay him back

Established Community Backer ***

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?


@Malcolm Ziman wrote:

Why is the business paying him back?  He should be paying the previous owner from his own funds, no reason for the business to pay him back


Right, the original purchase from personal funds is the new owner's equity. It establishes share value upon which some states impose a capital stock franchise tax.

 

Experienced Member

Re: New owner of S-Corp purchased business for $20,000. He used personal funds and the business is paying him back. How is the purchase and payments recorded?

So I’m a bit confused. Please help me understand what entries to make for this SCorp single owner.  New owner purchased the business for $20,000. He did not pay the previous owner in cash. A family member loaned him the money to buy the business. In 2018 he paid back $4200 to the family member so far and paid it out of the business.  What to I need to do for a journal entry to recognize the shareholder contribution (equity) and payments?  Are payments simply distribution back to shareholder? And no loan should be booked?  How will this effect his taxes?