Equity Structures
What is a Single Member LLC and how do we arrange the Equity section?
A Single Member LLC is a legal structures as opposed to a tax structure. When it files taxes, it can be considered either an S-Corp OR a Sole Prop.
When setting up the books, they will have "Member Contribution", "Member Distribution", and "Member Capital"
What is a Promissory Note and where should the ledger be categorized?
A promissory note is slightly less formal than a full on loan, but they function in the same way. The note serves as a legal document establishing that money needs to be owed. As such, it lives in the Liabilities section of the Balance Sheet.
What are two ways in which each client will be treated different for their bookkeeping?
• Equity set-up
• COGS
• Categorizations
• Other?
What is an Equity Closing Adjustment?
Equity Ledgers like MC, MD, APIC, SD, and CYE start from $0 each year. In order to bring it back to $0 at the start of the year, we need to make a manual adjustment called an Equity Closing Adjustment.
How do C-Corps pay taxes?
C-Corps are taxed at the company level, and then the shareholders themselves again pay taxes on any dividends. In the books, we should only be seeing the company payment. If they are paying personal taxes using their business account, it needs to be considered a loan to the shareholder (Liability)
What company structures can sell stocks and where should the ledger be categorized?
S-Corps and C-Corps can sell stocks. It is one of their primary advantages over Partnerships and Sole Props. Stocks are recorded in the Equity section of the Balance Sheet.
How might a Cafe, a Law Firm, and a Janitorial Service each treat Walmart transactions differently?
• Cafe: Cost of Goods Sold
• Law Firm: Office Supplies
• Janitorial Service: Cleaning Supplies (Custom Ledger)
Why do we make Schedule L and/or CPA Adjustments?
CPAs will often make small changes to the books for tax reasons prior to filing the taxes. We need to make sure those changes are reflected in our books to ensure consistency year over year.
If you are looking at a Partnership, but there is only one parted listed on the Balance Sheet, is this a problem?
Yes! A partnership always needs at least two partners. If there is only one partner listed that means it either isn't a partnership, or we don't have all the needed information about the company.
What is a SAFE Note and where should the ledger appear?
Simple Agreement for Future Equity Notes (as well as Convertible Notes) essentially allows investors to put money into the company at one point in time, but wait to actually get the shares until a later date. This is good for early startups that do not have clear valuations. SAFE Notes are Equity ledgers whereas Convertible Notes are liability as they accrue interest.
• Sales Revenue
• COGS/COS
• Inventory
• Loans
• Taxes Paid
• Property, Plant, & Equipment
• Other?
What date will CPA AJEs be dated to? How about Equity Closing Adjustments? Schedule L Adjustments?
• CPA AJEs: December 31st
• Equity Closing Adjustments: January 1st
• Schedule L Adjustments: December 31st
Sole Props do not have a difference between their owner's and the business' finances. As such, the earnings from the company are quoted on the individuals tax return, and all taxes are paid from the same money. As such, all taxes are typically considered "Member Draws"
Which company structures can't issue SAFE Notes?
Sole Props, Partnerships, S-Corps, and obviously Non-Profits all can't issue SAFE Notes. Only C-Corps can issue SAFE notes. If you see any other company structure with SAFE Notes on their Balance Sheets, we probably have their equity section wrong and we need to confirm against a Tax Return.
How might what a company does affect whether or not you are expecting to see Payroll in the books? If you expect to see it, but don't, what question might you have?
If there is a sole prop that sells cookies out of their house, I would not expect to see payroll. If it is a Law Firm, I would expect to see at least an assistant on payroll. If there turns out to be no payroll for the latter, I'd want to know the AA actively confirmed there is no payroll because it could be an indicator that there are things we are missing.
What is unique about Partnerships Equity Closing Adjustments?
Beyond closing Member Draw and Member Contribution, we also need to close the Current Year Earnings ledger. CYE gets closed to every member's Capital ledger proportionately to their ownership %.