How do I post the profit on a real estate sale (flip) to each partner?

You don't.

The company is a partnership, that means the company spends and earns money as a company

at the end of the year you prepare the income tax forms, form 1065, to report income and expenses for the partnership.  As a part of that form 1065 you prepare a form K-1 for each partner, that K-1 splits out the income and expense the partnership made to each partner in accordance with the profit sharing stated in the written partnership agreement.

the K-1 is basically the partner P&L for the year, and the bottom line, net profit is the amount taxable to the partner.

at the start of the new year QB puts net profit for last year in the retained earnings account.  Then you distribute retained earnings to each partner equity using journal entries.

debit retained earnings, credit partner equity

For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts  (one set for each partner if a partnership)

[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

Thanks @Rustler for the excellent explanation!

With this setup, how would I keep track of each partners earnings throughout the year?

Can I divide up the earnings for each property flip throughout the year instead of waiting for the end of the year?

Can I have an additional partner equity account to track earnings such as illustrated below?

> Partner Equity
>>> Partner Draws
>>> Partner Investments
>>> Partner Earnings

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@Real Estate Partners LLC wrote:

Thanks @Rustler for the excellent explanation!

 

With this setup, how would I keep track of each partners earnings throughout the year?

As I said you do not, the business makes money, not each partner.

 

Can I divide up the earnings for each property flip throughout the year instead of waiting for the end of the year?

you could but it would result in some serious adjustments come year end, don't forget each partner also shares in all expenses, interest earned, etc etc - just not the way it is done normally.  The partners should care that the business makes money

 

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Thanks again @Rustler for the reply.

I understand what you mean, that the business makes money and not each partner. The reason I’d like to track each partner’s equity throughout the year, is because the ownership % for each partner can change per property depending on each owner’s equity position at time of purchasing that particular property (i.g., If an owner makes a draw/investment between one property purchase to another). So it would be nice to easily see each owner’s equity % at any moment in time. All expenses for that particular property are split according to their equity position in that property. Final profit for each flip is figured out after close of escrow.

To simplify our accounting, all general expenses as well as bank interest income are split equally between the partners.

I don’t see why there would be year-end adjustments if this is tracked on a continuous system and kept updated. Maybe I’m not seeing something because I’m new to QB, but I’ve been tracking it this way with Excel for many years. I’m transitioning to QB to hopefully simplify my bookkeeping.

In previous years, I turn in all our final numbers to our CPA after years end with a one-page recap on Excel, and he seems satisfied with it.

Thanks again for any input you can provide.  

I think I have a solution for how I’d like my accounts setup. Having a third equity account for each partner would allow me to keep track of all distributed profits and expenses to each partners equity account.

> Partner 1 Equity
>>> Partner 1 Draws
>>> Partner 1 Investments
>>> Partner 1 Share of Profit/Loss

If anyone has any differing opinion or advice on this, I’d appreciate it.

What you are doing is Micro-Managing Equity, unnecessarily. All of this is a slice-and-dice of Equity, no matter how many little pieces you seem to want to break it into for tracking purposes.

For one thing, you don't have Earnings.

"Share" of Profit/Loss is the same thing as Equity. Equity = the owner's Investment or Ownership Position in the entity. Equity is synonymous with Net Assets. It's like this "the accounting formula:"

Assets = Liability + Equity

Turn it around:

Assets (what we own) minus Liability (what we owe) = Equity or Net (difference) Assets.

You won't treat Equity the same as Job Profit. Job Profit is an operational perspective, so you run Job reporting, to analyze Activities and how well they did or did not do. That is not the Entity's Financial position.

Following Rustler's outline:

Each partner has >> Equity (parent level); then subaccounts:
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here and for the first date of the new year, once the year end adjustments and allowances are entered, you can Offset Retained Earnings into each Partner's Investment subaccount

Because their "earnings" is the same as their Investment in the entity. These are Synonyms. But, you won't know this Value until the year end filing is prepared.

Thanks for your perspective @qbteachmt !

I may be micro-managing equity as you say. My reasoning for separating out Investment with a 3rd sub-account, is so that I can clearly see what that partner actually put into the business verses the money he made. It’s all equity, but just my way of separating it out to clearly see. I’m new to QB, so I may not be thinking right about this. Let me know if there’s a better way, thanks!

The point is, you don't separate everything as it happens because you are running a business entity. You need to Work Cooperatively, not think of this as three individuals. Be in business, not playing at business.

Although we’re setup as an LLC for our business structure, we are still in fact and in reality, three individuals. The two others that make up the LLC are solely monetary contributors to the business. I handle 100% of the operations of the business (of course I hire people to do work on the property, etc.). Part of my motivation is seeing that I’m making money for the two partners as well as myself. Looking at it this way, I don’t see why it would be wrong to separate out the equity accounts to clearly see actual earnings verses what was contributed. Anyhow, I appreciate your perspective and all the helpful info you have provided.  Learning QB is different than how I was doing it all manually in Excel. 

You are not understanding this part: "Although we’re setup as an LLC for our business structure, we are still in fact and in reality, three individuals."

No, you are not. Legally and for tax purposes, you are an LLC member. You have it backwards.

"The two others that make up the LLC are solely monetary contributors to the business."

So?

"I handle 100% of the operations of the business (of course I hire people to do work on the property, etc.)."

So?

"Part of my motivation is seeing that I’m making money for the two partners as well as myself."

The Entity has a financial perspective and you run the financial reports for this entity.

"Learning QB is different than how I was doing it all manually in Excel."

QB is as Tool and you use it to manage the financial data appropriate to the tax entity type.

"Looking at it this way, I don’t see why it would be wrong to separate out the equity accounts to clearly see actual earnings verses what was contributed."

You are supposed to be the financial manager for the Entity. Not "personal banker for three individuals." You change your Hat and your Perspective, as if you and them are Separate from the Entity. You manage the Entity.

None of your peers users, and some of us also Teach this, can continue to debate why you have the wrong perspective for this. It is time to talk to your own CPA.

I have no doubt that you’re correct in your approach of accounting and QB.

Maybe it’s because I’m looking at it from outside the sphere of QB. Whether I split each partners Equity account into two or three subaccounts, the final number in the Equity account is the same. I just see an advantage of separating out the Investment subaccount to differentiate money that was contributed verses what was earned. Again the Equity account for each partner will be the same, just more detailed in my point of view.

If anybody else sees my perspective on this issue, let me know. If not, I guess I’m out in the cold…

Yes, we agreed that you can set up the account split equity for each partner as:

Equity <== parent level, never post here

Investment <== new money in and the ending balance after every year end is done

Draws <== money taken out which is taken to Zero the first date of each new fiscal year by closing that balance to Investment, above

That way, for each partner, you might see this:

$100,000 in

 $50,000 taken

And the first date of the new year, you Close Retained Earnings to each Investment account, as well. This is when you make the Split you keep trying to do nearly daily. That is All you need, and you don't do it Every Date you are working. This is the part where you seem to be confused. It is not Each activity. It is the Performance of the Entity, that matters.

Like this:

Dec 31...

Each partner has $100,000 Investment and $50,000 taken. The Entity shows $300,000 as Net Income for Dec 31 after all year end tax adjustments and allowances are entered. You are each 1/3 partners. So for Jan 1, you:

Split RE to each partner Investment account and Zero Out each Draw account also to the Investment account for each partner.

And as long as there is no business activity on Jan 1, you see:

Each Partner has $150,000 Equity

There is no Net Income

There are no Retained Earnings (all got allocated)

And you compare that to the K-1 from the 1065. Because the 1065 = This Entity, not three people acting as a business but Being In Business. Be Proud.

Something just clicked from reading your last post… my thinking would only make sense (at least to me) if I wasn’t closing out the Draws and Retained Earnings at the beginning of the new fiscal year. As I said, I’m new to QB, so my brain is throwing out more questions than my learning has caught up to… So if I’m closing out Retained Earnings and Draws… that brings up a batch of new questions. So I’m not going to keep track of the running total of capital investments and draws by looking at the Equity account in the Chart of Accounts as I was previously thinking. Then where do I do that? Is there a report I can run that will show me exactly what each partner has put into and taken out of the business account?

Second question, if everything that was earned throughout the year is held in the Retained Earnings account, it would be easy to close that out to the partner’s equity account if we were equal partners or had a set % split for the entire year. But in our case, every property might have a different % split? This is why I need to keep track of the earnings of each partner property-by-property, so that I can accurately close out Retained Earnings.

Warning… possible ridiculous question coming up… What about creating three subaccounts in Retained Earnings for each partner to keep track of their earnings? Or is there a better solution? For example, if we flip five properties next year, and each property has a different equity split because of draws and capital investments throughout the year by each of the partners, how to keep track of everything? This comes back to why I’m so keen on keeping track of each partners earnings throughout the year. Just to clarify, we’ve agreed as partners that the profit from each property we flip will be divided according to our equity position at time of purchasing that property. General expenses (non-property specific) are split equally. 

Thanks again for all your helpful advice. I’m not sure if I’m thinking too much into this or if it’s because our partnership structure isn’t typical, but I’m committed to learning QB to simplify my bookkeeping instead of entering everything manually in Excel. Thanks again!

"So if I’m closing out Retained Earnings and Draws"

This is year end allocation for purposes of the K-1, because the info then is used by each of you on the personal tax return. This is a Pass Through Entity.

"So I’m not going to keep track of the running total of capital investments and draws"

Yes, you are. Every time someone puts money in, that would be posted to their investment; every time you take funds as Draw, you post it as Draw. That is not the same as trying to split every Job-related activity. And work with your own CPA, because you described that the capital input is not even to the ownership position; you need that person's guidance for when an investment is Loan, not Equity. No one on the internet can work with you on these issues.

"by looking at the Equity account in the Chart of Accounts as I was previously thinking."

Stop looking at the Chart of Accounts. Run Reports. Reports are Dated financial reporting perspectives. The Chart of Accounts is your infrastructure. That is like looking at the floor framing of a house and trying to determine what the house really looks like; look at the Full Picture, not the framing.

"Then where do I do that? Is there a report I can run that will show me exactly what each partner has put into and taken out of the business account?"

Run Bal Sheet, P&L and Statement of Cash Flows, as well as your performance reports such as Job reports. Have your own CPA teach you how to understand the financial data.

"Second question, if everything that was earned throughout the year is held in the Retained Earnings account"

It's not Retained until the next year. I think you are confusing Equity and Retained Earnings. RE is one type of equity. In the current year, you see Net Income from the P&L also reported in Equity. This is how the financial reports relate. The performance of the business to date in any fiscal year contributes to Equity (health and wealth of the business) as Net Income, from the P&L and seen in the Bal Sheet and also on the Statement of Cash Flows. That's how you know the reports Relate and are reporting from the same perspective. Please see my attachment.

But your WIP projects are all on the Bal Sheet as Asset = work in process, or invested costs for something not yet completed.

"it would be easy to close that out to the partner’s equity account if we were equal partners or had a set % split for the entire year."

You do; that's the point of LLC formation = we agreed, already.

"But in our case, every property might have a different % split?"

Now you need to work with your own CPA; you seem to have changed your concept from Partners to Lenders. It doesn't matter what is the Agreement in the LLC, such as one flipping LLC might be 40/40/20. If one of the three puts up all the money, then you might have a situation where that is liability, not equity.

"This is why I need to keep track of the earnings of each partner property-by-property"

That still isn't what happens. Please, stop asking on the internet and meet with a CPA that understands construction, work in process, and your entity.

"so that I can accurately close out Retained Earnings."

You always accurately close it out, because you have the Tax reporting. You use the Values that were computed after the tax form is prepared and that is reported to State and Fed. Honestly, unless you intend to get up to speed on the TCJA of Dec 2017, as well, you really cannot expect to do this for yourself, and not in advance of the year end. Did you know Real Estate activities are the most affected by the TCJA of nearly all possible business operation types? That's why you use a CPA; they stay current on the rules that they know applies to you. You manage your business and get proper professional guidance from others.

"What about creating three subaccounts in Retained Earnings"

It cannot have Subaccounts. It represents the full entity. The Program doesn't even allow it; that's how wrong this would be.

"for each partner to keep track of their earnings?"

You Don't Track Earnings. Stop asking the same question over and over. Sheesh. Have some respect that your peer users volunteer to help here, and don't keep badgering when you've been given the best guidance you will get For Free from the Web. If you don't like what you learn here, stop asking the same question here.

"Or is there a better solution?"

I teach this, and I know you sometimes have to restate something in different ways, so that someone learns it from one of the presentations. You clearly know we've covered this concept thoroughly. I am sorry you don't like the answers.

"if we flip five properties next year, and each property has a different equity split because of draws and capital investments throughout the year by each of the partners"

That's isn't what happens for Draws. either.

"how to keep track of everything?"

Draws are a banking event that you track as from Equity. Investment is a banking event that might be equity or lending. That means some payouts might be debt service. If I decide to offer you $100,000 that would be Lending, not Equity. A partner can participate as both. And the LLC doesn't have to require that capital account balances match ownership share. You need to meet with a CPA.

You never track Earnings. You track Operations. Earnings is the math result from Operations. You can run reports to see Performance, such as By Job and Financial reporting.

"This comes back to why I’m so keen on keeping track of each partners earnings throughout the year. Just to clarify, we’ve agreed as partners that the profit from each property we flip will be divided according to our equity position at time of purchasing that property."

Honestly, people have great intent, and then learn they didn't follow the regulations or their own formation documents. Get Professional Guidance.

"General expenses (non-property specific) are split equally."

No, they are not. They are part of Operating that entity.

"or if it’s because our partnership structure isn’t typical"

You formed a Legal Entity. You don't have "isn't typical" because you have what you Formed, and you Comply with what matters. Not with what we decide on the fly at any time.

"but I’m committed to learning QB to simplify my bookkeeping"

What you should be committed to is learning what is required, and then learning how to use QB to do it. If I give you a hammer to build a hospital, you don't get to decide to use it to pound an ant hill, if you are supposed to be building a hospital. You learn how to use the hammer, and you use it to build the hospital.

Everyone things their situation is "special" and we are all snowflakes. But in the US, we follow the regulations. You formed a Legal Entity; you did so to also provide for some legal protection, some separation of self and this operation to protect personal assets, etc.

Do it right, by getting proper guidance. Consult with that CPA on occasion, before implementing some "great" idea you have that might not be as you envision it.

It's really costly when you do this wrong. It's really easy to do it right, by getting proper guidance from your own professional that supports you in your process.

Thanks again @qbteachmt for your thorough reply!

Once I meet with my CPA, I’ll post a follow-up on how this was resolved. I have a lot to still learn about QB. Unfortunately even after thoroughly reading through this post again, some key issues were not resolved for me. For now, I’ll continue to also use Excel as a supplement to QB, to keep track of things I still need to keep track of so that the business functions as we've set it up to. I’m hoping I’ll eventually be able to ditch Excel and have it all work for me in QB.

The point of using QB is that you get Two bangs for the buck:

Financial data management = for tax tracking and reporting

Project data management = to provide Operational tracking and Performance reporting

That's what I keep trying to help you see are separate perspectives, based on the same data.