Question on LLC member distributions w/o closing books

[Wm]

Sat, 21 Feb 2015 11:45:11 <54E8C427.9030806 at cmail.nu>  Matt Kowske 
<jmk at cmail.nu>

[some snips to (hopefully) help us concentrate on relevant bits]

>> if you are going to arse about with retained equity in a two person
>> LLC then why not divvy it out there and then? the answer is probably
>> tax but don't make the LLC something it isn't is my advice.
>>> and just let that be
>>> auto-calculated on the balance sheet. Distributions would still occur
>>> against the same account (e.g. 'Member A Distributions').
>> Not quite, gnc is mainly used to do the sums for "a book" in this case
>> the entity "the book" seems to encompass is the LLC, if you want to take
>> some or all of the Assets of the LLC, and transfer them to the Equity
>> accounts of A and B then that is cool so long as you record that in most
>> places.  Normally you transfer the money out of the entity accounts and
>> into the Member Accounts by writing a cheque or making a bank transfer.
>>
>> Neat and tidy for the LLC Equity Account.
>
>Alright, so if I follow you correctly, you are saying to simply make a
>transfer from the assets to equity. Distributions are then deducted from
>the member equity account when a check is written. What I'm having
>trouble with is that if I were to make that transaction in GnuCash --
>transfer from assets (checking account) to equity (Member A Equity) --
>the money is still in the checking account.

If the distribution is "on paper only" then you use a Liability (upside 
down Asset) account to recognise the amounts the LLC owes but hasn't 
distributed.  Does that solve the bank account problem?

The point is Equity / Capital is balance sheet only so you can't (or 
shouldn't) use Income and Expense accounts for this sort of transaction.

> While the balance of the
>checking account from the bank will say one thing, GnuCash would say
>another. By transferring from the income/expense accounts into equity
>that doesn't happen, since you're doing an equity->equity transfer, both
>of which are abstract.

Income and Expense accounts are used to change the balance sheet 
accounts (Assets, Liabilities, Equity).  My understanding is you want to 
shift things about on the balance sheet and that there isn't any obvious 
expense or income in the transactions overall. Ergo you shouldn't use 
them even though they seem convenient.

You used the word abstract above and that is sort of right.  You are (or 
should be, I think) using the balance sheet accounts to recognise the 
change in equity.

>>> Since it is just 'Income-Expenses' it will
>>> not account for the member distributions that happened.
>> Wouldn't that be because you haven't actually made them? If you do make
>> them they will be included.
>
>They would only be included if classified as an expense. I guess it is
>more of an accounting question as to if member distributions should be
>considered an expense or not but that isn't how I think of them.

Usually not but that could be very different in other places, that'll be 
about tax regimes.

>When
>evaluating the net profit of a business I would look at the revenue -
>expenses. A profit distribution or dividend isn't an expense in that sense.

Exactly!  I think you are answering your own question now :)

>>> From what I
>>> understand it SHOULD account for this as the definition of retained
>>> earnings is net profit - dividends (which in this case is called a
>>> distribution).
>> Try the Equity Statement for another view of were you started, where you
>> ended up and what happened in between with a few dates (try a few months
>> apart where you know something or nothing happened to get the feel) to
>> see if things make more sense.
>>
>>> I am struggling with where the distributions ultimatley come from in the
>>> double entry accounting
>> That's easy.  Assets (decrease) or Liabilities (increase).

>Again, to increase a members equity account from a real asset like a
>checking account would make my balance out of sync with what the account
>really holds.

That is one of the things that Liabilities are for.

> It seems to come down to whether it is okay to classify
>the payout as an expense.

I'd say a big NO to that not for any moral reasons but plain old, "it 
isn't an expense".  Recognise it in the Balance Sheet (increase 
liability) and when a money transaction occurs then offset the other leg 
in Equity.

>I think this could work if there was an option
>in the Balance Sheet report options to define exactly which accounts are
>used to calculate 'income' and 'expenses'. I would just exclude
>'Expenses:Member Distributions' from that calculation.

I think you're almost there conceptually.

An unpaid but acknowledged distribution from the LLC to the Equity 
holders is a transaction between Liabilities and Equity.

Expenses needn't and should not be involved unless there is a 
transaction charge imposed by a bank or similar when the money changes 
hands.

>>> I
>>> would like to know how others handle this -- thanks.
>> One way is to run some reports, work out who gets what and make
>> appropriate payments.  Record them.  Ordinary.
>>
>
>Thank you for the responses -- hopefully I've cleared up my problem a
>little.

I hope I am helping.  I think the underlying query is "what is the 
balance sheet vs income and expense difference really all about?"

That applies to many situations and is a general case to me :)

Let us know how you get on.

-- 
Wm...