Forums: Discussions for entrepreneurs and small business.

We are an LLC with two members. Each of us has a 50% share of the business.  We started business late last year and we had a loss for the year.  So my question is do I distribute 50% of the loss to each of the Member`s equity accounts or do I leave it in retained earnings?

I`m confused as how to answer your question due to the terminology you are using.  Is this a financial statement question or tax question?

Are you a corporation?  Corporations have retained earnings.  Are you a S-Corporation, which was previously a corporation and thus has retained earnings?

Are you a partnership?  Is this a husband and wife joint venture?  Was this partnership or joint venture previously a C-Corporation with retained earnings?

If you are a corporation and you have a loss then the corporation has a negative balance in it`s retained earnings account, which is also referred to as retained losses.  If you are a corporation then you do not "distribute" this earnings to the shareholders.

If you are a partnership or joint venture and your question is really how to determine and/or allocate basis among the partners, then it would depend on what your partnership agreement states as to how losses are to be allocated.




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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com

Hi Gina,

Thanks for answering!  We are an LLC structured as a partnership.  Our operating agreement states that we split the profit/loss 50/50.  We have two members.  This is a financial statement question.

On my balance sheet I have two "Member Equity" accounts.  One for me and one for my partner.  I also have a "Retained Earnings" line.  Currently our loss for last year shows on the retained earnings line.  Do I leave it there, or make a journal entry to distribute it evenly to the "Member Equity" accounts?

Thanks again!

For financial statement purposes, if you were never a C-Corporation then you should not have anything in Retained Earnings.

If what is in your account titled "retained earnings" is the net of the income and expenses and all income and expenses are to be split 50/50, then yes, make a journal entry to remove the amount from retained earnings and put it into "Members Equity".

In financial statements you normally do not see each member`s equity account.  If you wanted to disclose this information it would be placed in either the notes to the financial statements or a supplemental schedule or both the notes and the supplemental schedule. 

Usually, the notes to the financial statements would briefly explain what is worded in your partnership agreement as to how the income and expenses are divided (including non-deductible items, if any) and a supplemental schedule would divide the total member`s equity between each member.

The reason a supplemental schedule is usually used is because when one is requested it is usually to show the difference between the partner`s inside and outside basis.

Best wishes,
Gina



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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com

Thanks for your help Gina.  That clears it up for me. 

Best Regards,

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Rich Sloan , Co-Founder, Chief Startupologist, StartupNation

I agree!  She`s been a big help to me and has answered some of my other questions as well.  I`d give her a five out of five also.

Thank you all for your kinds words.


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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com