Hello, I am setting up the books for a new company and need some guidance on how the initial equity transactions might be booked. We'll call this company NewCorp.
NewCorp is an LLC, but treated as a partnership because it is owned by two other LLCs.
NewCorp's ownership structure is:
LLC A - 25%
LLC B - 75%
LLC A deposited $10,000 to the bank account as startup funds; LLC A and its member will not be actively involved in day-to-day business operations.
I believe this would be: Debit Cash, Credit LLC A's Equity account.
LLC B did not contribute any cash, and will be 100% running the business.
If ownership is 30/70, then LLC B's equity should be $30,000. LLC B's owner is taking a reduced salary in the form of a guaranteed payment, with the thought that the gap between the reduced salary and the market value for managing NewCorp will serve as LLC B's contribution.
Booking:
I understand that the way to book this would be to create a sub account to wages and debit it for the difference in salary paid vs market value is performed/accrued, and then credit LLC B's capital account.
If done this way, the equity transfer is taxable as income to LLC B.
Other Option - Intangible Asset?
If the above method was not followed, could LLC B's owner instead have booked their expertise, knowledge and ability to start up and run the business as an intangible asset valued at $30,000, to offset the initial Equity Transaction? Is this approach common, acceptable, allowed? (Of course, if agreed to by both owners.) If yes, what would you call the account? "Intangible Assets" or "Goodwill"?
Sorry if that makes no sense!
To summarize, I am a little confused by how the two owners intended to set things up (LLC A & B), and am looking for some general guidance in how their goal might have best been achieved, which is:
LLC B has no cash to contribute to start-up costs, but without LLC B there is no business; and ownership agreed to was 30/70 (for purposes of future distributions or contributions).
And, yes I understand, I am not asking for tax/financial advice; but am interested in knowing what are the generally accepted methods of accounting for this kind of scenario.
Thank you!
