By Lane V. Erickson, Idaho Business Attorney
In a previous article we talked all about how the operating agreement controls the LLC between the owners. The operating agreement also has control over the capital accounts that exist for each of the owners of the business. Keeping a good and accurate record of the capital accounts of each of the owners of the business is vitally important to the continued operation of the business. It is also important if the business is coming to an end.
You may have questions about capital accounts and we can help. At the Racine law office, we use a team approach when it comes to assisting our business clients meet all of their legal needs including setting up and operating an LLC and helping with capital accounts. Our team of Idaho business lawyers includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley.
Each of the attorneys on our team have earned the highest ratings possible from all legal ranking services including Martindale Hubbell, justia, and AVVO. Are attorneys are knowledgeable and experienced in assisting clients meet their small business needs, including setting up and operating an LLC.
The purpose of this article is to help you understand what capital counts are. Additionally, we will discuss the things that affect capital accounts. Finally, we will discuss how a capital account is documented so that the proper actions can be taken during the operations of the business or when the business ceases to operate. This article is designed to provide basic information to you about capital accounts. It is not exhaustive, and we would expect that you would have additional questions. If you do, we are confident that we can help you.
What a Capital Account isThe best place to start this article is to explain what a capital account is. When an LLC is created, usually it is because you have one or more individuals who want to operate a business. To do this, the owners of the business will contribute something to the creation of the business. This could be cash, or it could be real estate, or personal property such as vehicles, or machinery, or equipment, or really just about anything else of value.
According to Idaho’s statutes dealing with an LLC, “A contribution may consist of property transferred to, services performed for, or another benefit provided to the limited liability company or an agreement to transfer property to, perform services for, or provide another benefit to the company.” Idaho Code § 30-25-402.
The purpose of a capital account, is for all the owners of the business to agree to the value of the cash, or property, or services that are provided to the LLC by the owner. Agreeing to the value of each of these items is important, because each of these must be documented at a certain dollar value in the capital account.
How a Capital Account is DocumentedThere are many ways that a capital account can be documented by the LLC. To be clear, it’s not really an actual account. In other words, it’s not like there is a bank that has an account in the name of each of the individual owners of the LLC with an actual dollar amount deposited in it that could be accessed by the owner. Rather, the capital account can be as simple as a spreadsheet on the LLC’s computer, or using some sort of accounting software, or even just a notebook page that identifies what each of the contributions are that have been made by the owners of the business and the value of those contributions.
In its simplest form, a capital account is just a way to track what the contributions are that have been made by each owner. It is true that this is done with dollar amounts or values. However, the capital account should identify whether it was actual cash that was contributed or whether it was some other form of property that has an agreed-upon value.
What Affects a Capital AccountThe value that’s listed for a particular capital account can be affected in a number of different ways. Assume for a minute that you have an LLC that is operating a car wash business. Let’s say that the car wash is low in cash for some particular reason and needs an infusion of cash from its owners. Additionally, assume that of the three original owners only one of them has the ability to make an additional cash contribution to the LLC. In this instance the capital account of the individual owner who is able to make an additional contribution will grow while the capital accounts of the other two owners will remain the same.
If any additional contributions are made, or any contributions are paid back by the company at any time, these should also be reflected on the accounting system that the LLC chooses to use. In fact, the capital account for each owner should be accurately and continuously maintained, which is important, because the structure of the LLC may change by either adding more members or having a member decide they no longer want to be involved in the business.
If there is a change in the structure of a business, such as having a new member wanting to become a part of the business, then their capital account will reflect any additional contributions they make to the business in order to gain an ownership interest in the business. Alternatively, if a person decides to leave the business, their capital contributions must be paid back, or must be bought out by either a new member or by the remaining members of the LLC.
There’s much more detail about capital accounts that applies to the ongoing operations of a business than can be explained in a simple article. If you have any questions or concerns about the capital accounts of your business, we are confident that we can help you.
Enlist an Idaho Business Attorney to Help YouOur team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.