Owners' equity and draws in two-person LLC

Hope CTHC · ‎August 05, 2019

We have just formed a two-partner LLC (carpentry and contracting) where both partners are working and earning income. Each partner bills an hourly rate for their labor and when customers submit payment, it is deposited in the company checking account and divided between partners based on how much each person worked. However, the partners don't necessarily withdraw their entire "paycheck" but instead leave some portion in the LLC checking account as a contribution to the LLC.

I need a way to track how much of what's in the LLC checking account is traceable to each partner, so that each can be taxed on the proper amount (what they earned) and, should the LLC dissolve, each can withdraw the correct amount from the business.

How can I do this?

My first thought is to deposit check, record an Equity Draw equal to the full entitlement *regardless of how much is actually withdrawn*, and then record an Equity Contribution equal to the amount left in the account as a contribution. This involves playing fast and loose with the actual financial events (actual amounts of withdrawals) but I think it would result in the income being properly assigned to each partner for tax and equity purposes. I'm wondering if anybody has a better, more technically correct solution to this problem.

Thanks!

QBsguru · ‎August 06, 2019

My suggestion is that you set up a class for each partner. Record income and assign a class. Set up an expense account for guaranteed payments. When you write a check, also assign a code. You can also apply a class to expenses either 50/50 for general company expenses or 100% to one partner if it is only related to one partner such as job supplies. You can then run a P&L by class to see each partner's total income and total expense. The cash in the bank would then be distributed by percentage of total.

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QBsguru · ‎August 06, 2019

My suggestion is that you set up a class for each partner. Record income and assign a class. Set up an expense account for guaranteed payments. When you write a check, also assign a code. You can also apply a class to expenses either 50/50 for general company expenses or 100% to one partner if it is only related to one partner such as job supplies. You can then run a P&L by class to see each partner's total income and total expense. The cash in the bank would then be distributed by percentage of total.

Hope CTHC · ‎August 12, 2019

Thank you, that's very helpful. Can you clarify what you mean by "When you write a check, also assign a code"? What code are you referencing -- the class for each partner?

Additionally, I can't see how to assign a class to income for each partner. In QB Mac 2019, I don't see an option to assign classes under "Receive Payments", nor can I see an option to assign multiple classes when writing an invoice (only to classify an entire invoice, which doesn't always work when both partners are entitled to income from the same invoice).

GraceC · ‎August 12, 2019

Hello there, @Hope CTHC.

Let me provide additional information so you'll be able to track the transactions related for each partner.

Here's how:

Go to the List, then select Class.
In the class List window.
Click the Plus icon, the new class pop-up window
Enter the class name.
Click Ok.

Once completed, make sure to assign each classes to all transactions that you create in QuickBooks. Doing so will enable us to determine the income and expense for each partner.

For your future reference, you can read this article: Filter, sort or total reports by Class.

If there's anything else I can help you with, feel free to comment or post again here in the Community!

QBsguru · ‎August 13, 2019

You need to assign a class to the invoice since an invoice records income. Receiving a payment reduces Accounts Receivable and increases either cash or undeposited funds both of which are balance sheet accounts.

Run the Profit and Loss statement on a cash basis by customizing the report and toggle the cash button.

Hope CTHC · ‎August 19, 2019

Right, thank you! I understand that I need to apply a class to each invoice. My problem was in trying to divide income from a single invoice between two partners. I figured out that I could create two separate line items on the invoice, each representing one partner's income, and assign each line item the appropriate class. So I believe the issue is resolved.

Thank you so much for your assistance!

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Owners' equity and draws in two-person LLC