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PDtax, CPA firm owner
Category: Financial Software
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Experience:  Have used almost every software package available.
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I have a single-member LLC and I have set up QuickBooks

Customer Question

I have a single-member LLC and I have set up QuickBooks Online for the company. How do I set up my Capital Account correctly?Currently, I have one account named "Opening Balance Equity" of type "Equity" with all the deposits for the initial capital. It's balance is the initial capital I have invested into the LLC.There is one other account named "Owner's Equity" of type "Equity" which is currently empty -- nothing there.How do I make additional capital contributions and how do I record those transactions?
How do I make withdrawals and correctly record those?Thanks for your time.
Submitted: 11 months ago.
Category: Financial Software
Expert:  PDtax replied 11 months ago.

Hi from Just Answer. I'mCustomer and can assist.

Expert:  PDtax replied 11 months ago.

Using one equity accounts is standard practice, but you could use two. Your call.

Your original capital was credited to equity, or opening balance equity. Subsequent income that the business retains will be added to it.

I like to use another equity account called draws for withdrawals you make personally. Then, at year end, close out out against your main equity account so that there is one total at year end.

Draws can be set up as a sub account of equity. Or just use the second equity account QuickBooks gives you as a default.

Expert:  PDtax replied 11 months ago.

Additional investments debit cash and credit the second equity account. Withdrawals debit the equity account and credit cash. At year end, close the second account to the first.

I hope this covers your questions. Ask any follow-ups you need. If you're all set, please rate my response to close out your inquiry. I'mCustomer

Customer: replied 11 months ago.
HeyThanks for the answer, but it's too telegraphic. I specifically requested a more thorough explanation.So, right now I have one company bank account with say $1,000. I also have this Opening Balance Equity account sitting at $100 and Owner Equity account at $0.
Last week I have withdrawn $500 from the company bank account to my personal bank account.How exactly do I reflect this in QBO?Cheers
Expert:  PDtax replied 11 months ago.

The withdrawal can be charged to the owners equity account for the $500 withdrawal. Withdrawals will be debited to the equity account, making it go negative (a debit balance).

At year end, your business income will be credited to the same equity account, giving you a year end equity balance that will agree with your tax reporting.

Expert:  PDtax replied 11 months ago.

The reason that single member LLC accounting has to be unclear from QuickBooks is that you have several options to report the LLC income to the tax authorities. Using a generic "equity" set of accounts allows the software to support you as a sole proprietor, C corporation or s corporation. As a single member LLC, you can choose any of the three. Each would have equity accounts, but be named differently, and easier to understand.

Customer: replied 11 months ago.
But then at year end the equity account's balance would be the business income minus the withdrawals.
The LLC has the default status of sole proprietorship, so I as the sole owner should pay the tax on the whole LLC income. Why would the withdrawals be subtracted from the income?I have marked all my withdrawals to the Owner's Equity account. Those don't show in the P&L report and the net income is unchanged. So if I withdraw all of the net income to my personal account, at year end the equity account's balance would be zero. How would this agree with my tax reporting?
Expert:  PDtax replied 11 months ago.

The first question first:

The equity account is used to net your contributions, income and withdrawals. Your sole proprietor equity is the sum of your investments and income, less withdrawals.

Now to the second:

Withdrawals have no effect on your tax reporting. If your business earns $100,000, but you don't withdraw any, you still report the income for tax purposes. The equity stays in the business until you withdraw it.