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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3964
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I have an LLC to Corp conversion. The LLC currently has Assets

Customer Question

I have an LLC to Corp conversion. The LLC currently has Assets of Cash and Receivables totaling $260,000 and Liabilities of Credit cards and payables of $278,000 creating a negative equity of $18,000. This is where my issue come from. The negative Retained Earnings are from prior years losses. When i convert to the Corp how do i treat this negative $18,000?

From my understanding i can't start a Corp with negative Retained earnings so i am at a loss.

Also when a conversion like this takes place how do you put capital stock on the books. it would be a credit to stock and a debit where? do i need to make a receivable and if so does it stay on the books for all time?
Submitted: 4 years ago.
Category: Tax
Expert:  PDtax replied 4 years ago.
Welcome to the site. I will be helping you today.

I assume the LLC had multiple owners, and the losses were passed through to them already. That means there is not negative Retained Earnings, but negative balances in their equity accounts.

If the owners had sufficient basis and/or were at risk, they could deduct their losses personally. This creates negative capital accounts, but not negative retained earnings. Retained earnings is zero.

Since the entity remains the same, I would allocate the original capitalization as the value of the stock issued, and the loss passthroughs as "prior year LLC losses passthroughs" or similar language.

I hope this answers your questions. If you need anything more, please ask. Thanks from Just Answer.
Customer: replied 4 years ago.

Yes you are correct, negative capital accounts. by original capitalization you mean what? there are 5 owners 1 put in money the rest did not. Their negative capital has come from prior losses to the LLC


Expert:  PDtax replied 4 years ago.
So, when this started, let's say one party put in $50, the other four got their ownership for $0. That is their original basis in their ownership.

Let's say there was $80 in losses, split evenly. After the distribution of losses, one member had basis of $34, the other four had -$16 each. Let's also say that all 5 had basis or at risk to use the losses.

Now as an S corp, the equity section might look like this:

Stock - Owner A 50
LLC distributions (A) 16
Stock - Owners B,C,D,E 0
LLC distributions (B, C, D, E) 64

for -$30 in the equity section.

No negative retained earnings, and the books make sense.

Hope this helps. Thanks again from Just Answer.
Customer: replied 4 years ago.

How do you account for the actuall stock issuance though. say they got 1000 shares of $.1 par value. you would need stock of 100 and what would the other side be?


Also the books don't make sense, can't a corp not have negative capital

Customer: replied 4 years ago.
Relist: Incomplete answer.
Customer: replied 4 years ago.
Relist: Answer quality.
Customer: replied 4 years ago.
Relist: Answer came too late.
Expert:  Lev replied 4 years ago.

Hi and welcome to Just Answer!

According to your last statement - the answer came too late.

Please verify if you still need the answer.
If not - you may simply close the question.

Expert:  PDtax replied 4 years ago.
Hi again from Just Answer. PDtax back after a few hours at the office.

Your corp can have negative capital at conversion. The prior losses were passed through to the owners. Their basis in the stock, both inside and outside, is negative, except for the owner who put $ in.

This is probably a temporary situation, since 2012 income/loss will be hitting these accounts in a few months. The negative equity accounts are ok and can be reported as such.

If this answers your question, please leave positive feedback, and thanks from Just Answer. If you need more information, please ask, but I will be away from JA until some time this evening.

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