Transfer between personal & business accounting question

[John Ralls]

> On Nov 26, 2015, at 8:30 AM, Matt Kowske <jmk at cmail.nu> wrote:
> 
> On 11/26/2015 09:44 AM, John Ralls wrote:
>>> On Nov 26, 2015, at 6:01 AM, Matt Kowske <jmk at cmail.nu> <mailto:jmk at cmail.nu> wrote:
>>> 
>>> This is a general accounting question on how to properly enter a
>>> transaction like this.
>>> 
>>> I have two gnucash files I maintain. One for personal and one for an
>>> LLC. The LLC is at a point where it needs more funds to purchase a
>>> property, so owners are transferring some of their personal money into
>>> the business account to make a down payment with.
>>> 
>>> On the business side I will enter this as Equity:Member A:Contributions,
>>> right? Or should this be a liability? On the personal side how should I
>>> account for this? Let's say I'm putting 5,000 of my personal money into
>>> the business. In my personal GnuCash file would this be Asset:Business
>>> Equity or Equity:Business?
>> I’m neither an accountant nor a lawyer, so treat the following accordingly and consider getting professional advice:
>> 
>> How you account for it depends on how the partners decided to raise the money. If they voted to increase their capital ownership of the partnership then record it as equity. If they decided that it’s loans then record it as a liability. In the former case there should be a resolution in the corporation’s minutes; in the latter, a loan contract between each partner and the manager/managing partner stating the terms of the loan: Amount, interest, term, repayment, etc.
>> 
>> The usual name for the equity account for capitalization is “paid-in capital” rather than “contributions”. I’d do it as Equity:Paid-in Capital:PartnerX rather than Equity:PartnerX:Paid-in Capital.
>> 
>> Changing the paid-in capital has the possible ramification of altering the ownership portions of each partner if the ratios of the transfers are different from the previous ownership ratios. That should be spelled out in the resolution. Loans have no such constraint.
>> 
>> In your personal books your money either adds to Assets:OurLLC or Assets:Loans:OurLLC depending upon whether the LLC treats the money as an increase in partners’ equity or as a loan.
>> 
>> Regards,
>> John Ralls
>> 
> Thanks this is really helpful in my understanding. I will treat them as loans for now. One question on the different equity accounts. Right now I have:
> 
> LLC Equity:Member A:Member A Contributions = $0
> LLC Equity:Member A:Member A Distributions = $0
> LLC Equity:Member A:Member A Equity = $5,000
> 
> LLC Equity:Member A:Member B Contributions = $0
> LLC Equity:Member A:Member B Distributions = $0
> LLC Equity:Member A:Member B Equity = $5,000
> 
> This is from when the LLC was setup as 50/50 ownership, 5000 for each member as initial equity. If we were to contribute an additional 2500 each to increase the member equity, retaining the same 50/50 ratio then, you are saying it should go into an account called "Member A:Paid-in Capital" (or "Paid in Capital:Member A") or would I just rename the "Member A Equity" account to be "Member A Paid-In Capital"?
> 
> Said another way, is the equity account I have already equivalent to your "paid-in capital" suggestion or would that be separated, like "Contributions"?
> 

Assuming that you each kicked in $5000 to start the company, the Member X Equity account is equivalent to paid-in capital. You can call it whatever you want, they’re your books.

I don’t know what a contribution in equity would be if not also equivalent to paid-in capital. If distributions has the usual meaning it’s generally a reduction in partner’s equity and unless you’re winding up the company comes from retained earnings — for which you should have an account.

Regards,
John Ralls