Taking Capital Accounts into Account

Let’s say you just started a new business—congratulations! When you contribute to your new business at the outset, as well as when you contribute again at a later point, that capital contribution and those of the other owners need to be tracked somehow. Enter the Capital Account.

A Capital Account is a general ledger used to track contributions by owners and the valuation of the business. This applies to partnerships, LLCs, and S-Corps but not Corporations. Keep in mind that these contributions are not just cash but can also be contributions such as real property and others. The Capital Account helps to keep track of not just contributions, but additionally any distributions, dividends, or sales over time as well.

Over time, the Capital Account combines initial capital and additional capital, as well as the share of profits of the owners of the company, subtracting distributions or dividends and shares of losses. Keeping track of these changes over time will give you a value of the Capital Account at any given time, which can be helpful for a business owner in a number of scenarios.

For example, if you need to seek a valuation of your business, in the case of a dispute or other situation, the value of the Capital Account is helpful. Similarly, in the case where you want to dissolve your company at some point, the procedure for distribution of the capital/property according to the formation documents is simpler when the Capital Account value is kept current.

My thoughts for Capital Account are simple: create a clear and simple way to keep track at the outset and be diligent with maintaining it. This can be done with something as simple as an Excel spreadsheet, as well as with accounting software. Diligent maintenance of the Capital Account will prevent issues later on in the life of your business. Please note that Capital Account balances and contributions are not the same as ownership percentages in the company.

Additionally, Capital Accounts have tax consequences which should be researched and kept in mind. For these issues, as well as how to write Capital Accounts into formation paperwork for your business and how to maintain them over time, a business lawyer and/or accountant can be very helpful. Just remember to take Capital Accounts into account when creating and running your business.

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