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PostPosted: Thu Dec 27, 2007 4:55 pm 
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Joined: Thu Dec 27, 2007 4:42 pm
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I am finishing up the first year of a very small LLC. I have a basic understanding of assets/liabilities/sales/equity/COGS/expenses and double-entry accounting.

As the business ramped up I listed my personal funding of the start up and additional cash under Notes Payable: Myself. I guess I was thinking that if the company was ever purchased (not that I thought it would be any time soon) I should get my initial investment out of it.

Q1: Is this typical/acceptible? If not, where should I have booked the cash I was contributing?

Q2: Is it appropriate to convert this NP to owner equity at some point? Is there anything that needs to be done other than a journal entry to accomplish this?

Thanks in advance for reading and responding to what, to you all, is probably a very basic question.


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PostPosted: Fri Dec 28, 2007 3:10 pm 
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Joined: Fri Dec 28, 2007 2:44 pm
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Location: Massachusetts
Q1: If you loaned your company money to fund your business startup costs, based on your comments, your entry might have been recorded as follows:

Cash - Debit $xxxx.00
Notes Payable - Credit $xxxx.00

If you are no longer going to require your business to pay back the loan, then, yes, you can make an adjusting entry to reclassify the loan and consider it Paid-In capital. The entry would be as follows:

Notes Payable - Debit $xxxx.00
Paid-In Capital - Credit $xxxx.00 (aka: Contributed Capital)

Q2: This entry can be completed any time and only requires a journal entry. Personally, I like to keep my journal entries well documented so I may offer an complete explanation if one was ever required.


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 Post subject: My choice
PostPosted: Wed Jan 02, 2008 12:54 pm 
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Nothing but the bare minimum investment necessary by law goes to equity. The rest of the capital and other asset contributions are set up as Loans Payable to Officers.

Unless you change to a C corp and expect to go public and want every dime invested as stock of your company, it's better to record your contributions as Loan Payable to you. That way, if you get some positive cash flow, you can draw it out as repayments of the loan instead of taxable income.

Since any cash withdrawal from the company to you is going to be a credit to cash, the debit will have to be either an expense to the company and income to you or a reduction to Loans Payable to you (no income to you) or some reduction of owner's equity (which is a little like paying a dividend or simply returning equity, which is somewhat unusual and might raise IRS questions.


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