Level 1

Owners' equity and draws in two-person LLC

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thought is to deposit check, record an Equity Draw equal to the full entitlement *regardless of how much is actually withdrawn*, and then record an Equity Contribution equal to the amount left in the account as a contribution.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!

 

 

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