Loan from Shareholder vs Capital Contribution in relation to Total Equity and Taxes

James1 · ‎October 27, 2017

Hello,

I have a Single Member LLC taxed as a sole proprietor. Aside from my initial capital contribution, I have put personal funds into the business. My CPA/bookkeeper categorized this as "loan from shareholder". I would like to know how my balance sheet would be affected (in regards to total equity as well as tax purposes) if I recategorized it as "capital contribution"?

Lastly, how would my balance sheet be affected (in regards to total equity and taxes) if I kept it classified as "loan from shareholder" but paid myself back? Would this lower or higher my total equity? Would i be taxed on it? and lastly, how would I categorize this in QBO?

The reason is because I'm trying to obtain a second loan (to open a brick and mortar gelato shop) and the bank wants my total equity to be at zero and not at a negative.

Also, if paying myself back won't affect my total equity, then I'd rather use the money and re-invest it rather than leave it in the business as a loan from shareholder.

Thank you so much! My CPA is very non communicative. I've only been in business for a year.

James

Adam_Fenner · ‎October 27, 2017

James

To start, I'm not a CPA, but I've passed all the tests, have the educational requirements and experience requirements. I'll be submitting my packet by next month. So, I'm not quite there, but I'm also not just spouting off crazy advice.

If you convert your loan from a loan to a capital contribution it will change some ratios, in a good way, especially if you are seeking financing. As the company would no longer owe you the money, it would simply be an increase to your shareholders equity that would be a good thing. I would think that a bank would view the shareholder's loan differently than a standard loan. As it is to you the business owner, and in a time of need, you could simply elect to not pay yourself. But if the bank cares, than convert it. The simple journal entry is:

Loan from Shareholder XXX

Owner's Contribution XXX

Subsitute the names used in your own chart of accounts. This will fix your debt to equity ratio, in a favorable direction.

If you have a more detailed question on how to do this I can walk you through, just let me know. Too bad about your CPA being unavailable. I've been hearing a lot of them aren't particularly good with customer service.

Best of luck

Adam

View solution in original post

john-pero · ‎October 29, 2017

It is a good thing your CPA is no longer your CPA. I, also am not a CPA but I will put my experience up against that charlatan any day.

Single Member LLC is not taxed at all unless you choose to be taxed as a corporation. It is a pass-through entity. All profit or loss migrates to your personal income tax form.

There are no shareholders in even a multi-member LLC, only members. Your initial infusion of capital and any additional contributions are Member Contributions of equity.

Here is what you need to do. Create the 4 equity accounts necesary. Overall Equity which is summing and not posted to and 3 equity sub accounts underneath. Member Equity. Member Contribution. Member Withdrawal. The latter 2 represent money in and out from and to you in cash. Member Equity is where profit or loss posts at year end.

Capital contribution increase equity. The mis-assignment as shareholder loan did not affect equity but created a false liability, actually lowering your balance sheet values

If you started your business with $10,000 cash from personal funds you record as Member Contribution and your Equity is $10,000. If you pay your self back your equity drops to zero. If you end the year with a profit equity goes up less any amounts you distibute to yourself. With a loss or distribution of member draw greater than profit the equity goes down and can become negative. Compared to a corporation you have no oligation to return equity to zero or above.

View solution in original post

Adam_Fenner · ‎October 27, 2017

James

To start, I'm not a CPA, but I've passed all the tests, have the educational requirements and experience requirements. I'll be submitting my packet by next month. So, I'm not quite there, but I'm also not just spouting off crazy advice.

If you convert your loan from a loan to a capital contribution it will change some ratios, in a good way, especially if you are seeking financing. As the company would no longer owe you the money, it would simply be an increase to your shareholders equity that would be a good thing. I would think that a bank would view the shareholder's loan differently than a standard loan. As it is to you the business owner, and in a time of need, you could simply elect to not pay yourself. But if the bank cares, than convert it. The simple journal entry is:

Loan from Shareholder XXX

Owner's Contribution XXX

Subsitute the names used in your own chart of accounts. This will fix your debt to equity ratio, in a favorable direction.

If you have a more detailed question on how to do this I can walk you through, just let me know. Too bad about your CPA being unavailable. I've been hearing a lot of them aren't particularly good with customer service.

Best of luck

Adam

Raywhite28 · ‎October 28, 2017

I'm no CPA but I was always instructed that a sole proprietor doesn't make loans to the business. Money going in is a capital contribution & money going out is an owner draw. Now, your CPA may know something that I don't know.

Changing from a loan to a contribution should not have any tax affect.

James1 · ‎October 28, 2017

Thank you that helps! All my journal entries were done by my cpa's bookkeeper who can no longer do my account. Personally I think it's because they don't wan't to lose time on a small start up.

So I don't know how to do journal entries and move the loan to capital contribution..

thank you for your help!

Raywhite28 · ‎October 29, 2017

Read Adam's reply. He gave you the journal entry or just edit the entry you bookkeeper made.

john-pero · ‎October 29, 2017

It is a good thing your CPA is no longer your CPA. I, also am not a CPA but I will put my experience up against that charlatan any day.

Single Member LLC is not taxed at all unless you choose to be taxed as a corporation. It is a pass-through entity. All profit or loss migrates to your personal income tax form.

There are no shareholders in even a multi-member LLC, only members. Your initial infusion of capital and any additional contributions are Member Contributions of equity.

Here is what you need to do. Create the 4 equity accounts necesary. Overall Equity which is summing and not posted to and 3 equity sub accounts underneath. Member Equity. Member Contribution. Member Withdrawal. The latter 2 represent money in and out from and to you in cash. Member Equity is where profit or loss posts at year end.

Capital contribution increase equity. The mis-assignment as shareholder loan did not affect equity but created a false liability, actually lowering your balance sheet values

If you started your business with $10,000 cash from personal funds you record as Member Contribution and your Equity is $10,000. If you pay your self back your equity drops to zero. If you end the year with a profit equity goes up less any amounts you distibute to yourself. With a loss or distribution of member draw greater than profit the equity goes down and can become negative. Compared to a corporation you have no oligation to return equity to zero or above.

James1 · ‎October 29, 2017

Great thank you! I figured that because I was a startup (on a low budget) my account wasn't worth her time (nor her bookkeeper that she assigned me to).

So i understand that paying myself back won't do any good to me obtaining a new loan if the bank is looking at total equity. I will recategorize it as capital contribution and go from there.

Thanks !

Adam_Fenner · ‎October 29, 2017

Not a problem. The loans can be very useful with you have multiple partners, but it is a moot point in a sole proprietorship. Unless there are regular payments and interest.

If you have any more questions let me know, quick stuff like this I enjoy.

I run my own accounting practice, and because of the stories, like yours, of poor customer service it is one of our top priorities.

qbteachmt · ‎October 31, 2017

There is no Loan here. You cannot be in debt to/from yourself, and the business entity is "I and my business are the same entity" = Sched C tax form. It is a good thing you no longer work with that CPA office. Sheesh.

Edit the Loan account and change it to Equity. Done.

"if I kept it classified as "loan from shareholder" but paid myself back?"

Impossible; this does not exist in reality. There is no Shareholder, because there is no Corporate structure, and there is no Loan. You are not a Member. There is no Partnership.

"The reason is because I'm trying to obtain a second loan (to open a brick and mortar gelato shop) and the bank wants my total equity to be at zero and not at a negative."

That original Deposit becomes Positive Equity. You invested in the business.

Justin37 · ‎May 09, 2018

This is a little late but after you pay down the shareholder loan, you will have more equity if you used money from the net income of the business. The net income is taxable but making the payoff is not taxable.

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Loan from Shareholder vs Capital Contribution in relation to Total Equity and Taxes