Question on LLC member distributions w/o closing books

[Matt Kowske]

Hi Alice,

For taxes we are classified as a corporation.

On 02/23/2015 09:53 PM, Alice Lee wrote:
> Are you taxed as a corporation or as a partnership?  When I know this
> answer, I can tell you the accounting process.
>
> -----Original Message-----
> From: gnucash-user
> [mailto:gnucash-user-bounces+alee212007=satx.rr.com at gnucash.org] On Behalf
> Of Matt Kowske
> Sent: Monday, February 23, 2015 9:12 AM
> To: Buddha Buck; Edward Doolittle; Wm
> Cc: gnucash-user
> Subject: Re: Question on LLC member distributions w/o closing books
>
>
> On 02/22/2015 01:09 PM, Buddha Buck wrote:
>> If I understand the question properly, I don't think it's so much a 
>> question of how to handle the owner's draw, but rather how to "replenish"
>> the owner's equity accounts.
> Yes, I think this is exactly where I am struggling.
>
>> I mean, let's say there is a business which has run for years and 
>> never "closed the books". The balance sheet says there's $100K in 
>> assets, $10K in liabilities, $5K equity for each of 2 owners ($10K 
>> total), and $80K in retained earnings.
>>
>> If one owner takes a $10K draw, twice his original investment, that's 
>> OK since his share of the business is $45K.
>>
>> But that would leave a balance sheet of $90K in assets, $10K in 
>> liabilities, $5K for one owner, -$5K for the second owner, and $80K in 
>> retained earnings.
>>
>> This is accurate, but it looks weird. It would look better if the 
>> retained earnings were distributed among the owner's equity accounts. 
>> But retained earnings is not a "real" account, it's a pseudo account 
>> computed from income and expenses.
>>
>> So what's the best way to distribute retained earnings without closing 
>> the income and expense accounts?
> This is the question I have been trying to ask in more words than were
> needed...
>
>> I can think of a couple of ways:
>>
>> I) Create an Equity:Distributed Earnings account, intended to have a 
>> negative balance, which distributions come from. It offsets the 
>> retained earnings. So in this case, the balance sheet would say $25K 
>> for owner 1, $15K for owner 2, $80K in retained earnings, and -$40K 
>> for distributed earnings. The total equity is still $80K, but more 
>> money has been distributed to the owner's accounts (if not pockets) than
> before.
>
> This type of thing could work, but wouldn't the "Distributed Earnings"
> account continue to become more and more in the negative over time
> eventually canceling out Owner's Equity and showing a negative equity for
> the LLC on the balance sheet? If 'Equity = Assets - Liabilities'
> then this would no longer show a correct balance sheet. Or what am I
> missing? How does the equity become replenished? You are replenishing from
> another equity account so doesn't it cancel itself out? For an even simpler
> example, the LLC has 100 in assets, 10 in liabilities, and 90 in equity.
>
> 1) After a distribution of 10 from a checking account it would then be:
> 90 in assets, 10 in liabilities, 80 in equity.
> 2) Another distribution of the same: 80 in assets, 10 in liabilities, 70 in
> equity. The 70 in equity is now a sum of the two equity accounts: 90 in the
> Initial Equity account and 20 in the Distributed Earnings.
> 3) Now the LLC receives income of 10 -> 90 in assets, 10 in liabilities,
> 80 in equity. Equity has gone back up by 10 -- because the calculated
> Retained Earnings will now show an additional 10.
>
> Ok, so I seem to have come to an understanding by writing that out. The
> balance sheet, over time, will have a larger and larger negative balance for
> Distributed Earnings and a larger and larger positive balance for Retained
> Earnings (calculated, assuming a positive profit is generated).
> This seems a little weird to me but it is correct accounting, yes? The total
> equity should remain close to the original amount of equity each member put
> in if payouts are made consistently and for all profits.
> Retained profits will be represented by the "Retained Earnings" on the
> balance sheet. The "Retained Earnings" account I have in my CoA should just
> be removed, as this is auto-calculated on the balance sheet. For some reason
> this approach seems a little "messy" but maybe that's just how it's done...
> I'm new with this.
>
> Correct me if I'm wrong, but a balance sheet shows a business financial
> position up to the current point in time. The difference in using the
> approach outlined above, and the old school closing of the books, would be
> that the balance sheet would show the amount of retained earnings over the
> entire course of time of the business if you do not close the books vs.
> retained earnings for the year (or whatever period the books were 'open').
> Is that right?
>
>
>
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