Re: Acctounting Question: Initial Capital Contribution

[Chris Travers <..hidden..>]

On Thu, Feb 25, 2010 at 11:43 AM, Hugh Esco
<..hidden..> wrote:
> In the Operating Agreement for a newly formed company it speaks of the
> initial capital contribution of the founding partners.  That investment
> was made in a combination of cash and sweat equity.  The Agreement
> later includes a provision providing for a 'Set Price' meant to
> monetize that initial capital investment.
>
> My question relates to how this set price ought to be "memorialized and
> made a part of the LLC records" as required.  I'm guessing that I want
> to create a GL entry.  I understand how to balance the 'Common Shares'
> account with the 'Checking Account' as a GL entry.  But I'm wondering
> how it is I make a balanced GL entry giving credit in Common Shares for
> the unpaid sweat equity invested in the start-up.

Ok.  I am not a CPA, but this seems like a fairly straight-forward
question to me.

In a small firm, I would skip the common shares bit for the main
principles and create separate equity accounts for them.  In a large
firm, you would have to hit a single account (common shares).  Either
way you are going to have three accounts involved:

1)  Asset/Checking account (debit cash contribution)
2)  Asset/Contributed labor account (debited agreed commitment)
3)  Equity/capital account (credited total contribution)

When the contributed labor is used as agreed, you can credit it
against a different equity account (called a drawing account).  The
drawing account would be manually closed (and zeroed) at year-end but
the capital account (tracking contributed equity) would not.

Hope this helps.

Best Wishes,
Chris Travers