Initial Funding and Asset Purchases
new_businessman
Member Posts: 2
I have a 3 member LLC with members A, B, and C. I renamed the Owner's Investment / Drawings account to A's Investment and added equity accounts B's Investment / Drawings and C's Investment / Drawings.
Initially all 3 members contributed capital worth $150k/each. A contributed property worth $150k; B and C each contributed $150k cash. That $300k cash was then used to buy an asset that depreciates over 5 years.
How do I record these transactions?
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Comments
@new_businessman,
If you have not connected the bank account then you would do a journal entry to record both the cash contribution and property. Create an asset class under Property Plant for the type of asset contributed. For purposes of below, I'm assuming a building. The entry would be:
Debit Cash 300k
Debit Building 150k
Credit Owner Equity A - 150k
Credit Owner Equity B - 150K
Credit Owner Equity C - 150K
If you are here in the US there are special rules regarding contributions of property to a partnership contained in Internal Revenue Code 704(c). For tax purposes, the partnership books contributed property at the lower of fair market value or partner cost for tax purposes.
@Mikeg thank you. I think I was adding a couple unnecessary transactions before, but this looks like it all makes sense now.
One question though since you mentioned it -- generally speaking how would you value intangible property that one member contributed? For example a media property that's somewhat difficult to appraise or sell freely (and thus easily generate a fair market value), but that cost thousands of dollars and hundreds of hours of sweat equity to build and was generating income before contributing it to the LLC? Clearly if they hadn't spent even $1 building it, it would be worth a substantial amount of money (generating thousands per month in revenue), but it's also difficult to ascertain a particular fair market value.
@new_businessman,
There are 2 perspectives on hand. The partners and the Internal Revenue Code. They don't necessarily conflict. Fair value is determined by what each party (partner) is willing to pay. So it's not a problem to say an intangible is worth 150k and give a partner capital credit for it. So long as the others agree. However, on a tax basis, that is where things would take a different turn. It becomes complicated. Two capital account types are tracked (book and tax). Because an intangible is an amortizable asset, special rules exist for allocations. The purpose of these rules is to prevent a partner contributing an appreciated asset (like this case) from shifting the gain they would have recognized to the other partners if the asset is disposed. Simply, if the partner had sold the asset and recognized a 149,999 gain he/she cannot now shift the recognition of the gain split 33.33, 33,33 and 33.34 (3 way equal partnership). There is a good article on Forbes that it explains it in plain english.
https://www.forbes.com/sites/anthonynitti/2017/08/15/tax-geek-tuesday-applying-section-704c-to-contributions-of-property-to-a-partnership/#3c4a280c44ca