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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2879
Experience:  Over 20 Years experience
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An LLC electing to be taxed as an S corporation. Do the chart

Customer Question

An LLC electing to be taxed as an S corporation. Do the chart of accounts mirror that of an LLC or Corporation?

The LLC had two members each with 1,000 in there capital accounts. One member (b) leaves and the company purchases his interest for $25,000.

Two months later another member(c)purchases the 50% interest for $30,000.

I've read that an LLC would book $29,000 of goodwill to member A's capital account, though it would not increase his basis so A and C would have equal capital accounts.

But since the LLC elected S corporation status I've been told the capital accounts do not have to be equal.

Should I not book the goodwill?
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax :

The chart of accounts is customized to each company. It varies little based on the type of entity.

Randalltax :

The issue over the equity interest has a lot to do with how the membership interests were sold or exchanged.

Randalltax :

Did Owner B sell his interest to Owner C directly, or did Owner B redeem his interest back to Owner A or to the entity?

Randalltax :

How about how did Owner D acquire his interest?

Randalltax :

How have you allocated the ownership of the company? Is it 50/50 A and D?

Customer :

When I ask about chart of accounts, I mean do I set up paid in capital or member interests?

Randalltax :

There are capital accounts representing the equity of each member

Customer :

Owner B sold his interest back to the company. The company issued a check to him.

Randalltax :

The original basis needs to be tracked for each member

Randalltax :

Did B receive a gain, loss, or get exactly his money back?

Customer :

Only 3 owners. B sold his shares back to the company.

Customer :

C then bought 50% interest from the company.

Randalltax :

Did B get his money back, or have a gain or a loss?

Customer :

B would have a loss. B beginning of the year basis plus his allocated earnings was more than the $25,000 received.

Randalltax :

OK. So you distributed to him his portion of the allocated earnings, plus only a portion of his equity investment, correct.

Randalltax :

That left a portion of his equity in the company, which is you. So this was allocated to your share. Now new investor C comes in and his equity account starts at $30K or whatever he invested.

Customer :

The $25,000 was a legal transaction covering his entire interest in the company.

Customer :

Yes, C invested $30,000. Member A's capital is $1,000 plus his share of current year earnings.

Randalltax :

OK, then C's in for $30K. simple.That's his equity position to start.

Randalltax :

Doesn't matter that your s in $1K or $100K.

Customer :

OK, I am confused about the books being accounted for as an LLC or more like a corporation.

Randalltax :

As to what?

Customer :

I thought that an LLC would distribute earnings based on their invested capital positions, but I guess not, you look to the operating agreement?

Randalltax :

If you are keeping your books to "tax", which most companies your size do, then it is treated like S Corp all around.

Randalltax :

Unlike a partnership, which IS different, members shares do not need to be the same as their equity investments

Randalltax :

1 member buys 99% for $100 and member 2 buys 1% for $50,000. You can do that.

Randalltax :

Yo uthen distribute profits per membership share.

Customer :

OK, so now I have Paid in Capital A - $1,000 and Paid in Capital B - $30,000. Then 2 retained earnings accounts to track their basis.

Randalltax :

That's it.

Customer :

Ok Thank you.

Randalltax :

PLease remember to take a moment and rate our answer. It is the only way we receive credit for assisting you today!.Thank you!

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