Hi,

I just formed my sole proprietorship business in to an LLC that elected S corp tax status. I have a few questions regarding the initial general ledger entries:

1. What equity accounts do I need to have? I have read some places that say Capital Stock, Retained Earnings, and Distributions.

2. Could you provide an example of the initial journal entry, assuming I paid $1000 in cash and $500 in equipment to the Scorp in exchange for my shares?

3. Using the above figures, my initial basis would be $1500, correct?

4. Do i need to set stock price, issue an actual stock certificate, etc.?

Thanks!

1. What equity accounts do I need to have? I have read some places that say Capital Stock, Retained Earnings, and Distributions. ========>>The S-Corporation needs to maintain excellent records regarding each shareholder's investment of cash or property including basis of each shareholder/EE. Generally, S-Corp accounting is the same as C-Corp accounting; in general, as you keep track of and allocate the equity put in by shareholders as well as the earnings generated by the corp itself, you will typically need a minimum of five separate headings within the shareholders equity section of your books: common or preferred stock issued( if you issue shares), paid-in capital, dstributions paid and earnings retained by the company, either for payment as future distributions or retained for planned investment or reserves. An S corp may issue stock to its owners. However, the IRS imposes a significant number of restrictions on the stock issued by the S corp.
Since you have a sole ownership in the S-corp, it is important to have a general understanding of your basis that increases and decreases with the activity of the S corp. basis is the amount of one’s investment in the S corp for tax purposes. When the Scorp files a 1120S, all shareholders receive a K-1 form , and the K-1 does not state the taxable amount of the
distribution, which is contingent on the stock basis. The main purpose of basis is to determine if S corp distributions are taxable / losses are deductible. The basis for each shareholder is calculated annually and must be tracked from day 1 of ownership. There are two types of basis numbers that you need to track: stock basis and debt basis. Most of
what you read above is stock basis. However, shareholder to receive debt basis, the shareholder must make a direct loan to the corp. The shareholder bears some risk in loaning the company money. Always have a promissory note and
collect interest on the loan. So,it is important for shareholders of S corps to maintain accurate records of their basis in the corporation

2. Could you provide an example of the initial journal entry, assuming I paid $1000 in cash and $500 in equipment to the Scorp in exchange for my shares?======Then,
Dr Cr

Cash 1000 Capital ( or Sh’s equity when the S corp issues shares) 1500
Eqmt 500

3. Using the above figures, my initial basis would be $1500, correct?====>Correct; your stoc k basis is $1500;as said it is important for shareholders of S corps to maintain accurate records of their basis in the corporation. But in reality I guess not many S corps keep maintain/track their records of baiss. In computing stock basis, the shareholder starts with their initial capital contribution to the S corporation or the initial cost of the stock they purchased.

4. Do i need to set stock price, issue an actual stock certificate, etc.?========> S corps may not issue more than one class of stock; an S corp is permitted to have one class of stock with voting power and one class of stock without voting power. For example, an S corp MAY not issue one class of share that receiving distributions and one class of share not receiving it. However, federal law allows S corps to issue different voting rights to different levels of shares within that one class of share. The Articles of Incorporation of the S corp will set out the maximum number of shares that the corp can issue to potential shareholders. This does not mean that the corporation must issue all of those shares. he value of each share should be proportionate to the company's net worth. The shares may be marked with a par amount establishing the minimum amount that the shares can be purchased from the corporation or with a no par amount having no set price for purchase of the share of stock. A stock certificate represents proof of ownership or investment in a corporate financial entity. All forms of corporations, including the LLC, partnership, including LLP, and LLP, should receive a certificate.

Thanks for your reply. Those answers help a lot.

One other question though, regarding S corps (correct me if I'm wrong about any of this):

At the end of the year, net profits get moved to retained earnings. As the single shareholder of my S corp, I will personally pay income tax on all of the net profits, whether or not I actually receive the cash.

So, let's assume that my S corp has a net profit of $1000 at it's first year end on 12/31/15. On 1/1/16, there will be $1000 in retained earnings that I already paid income tax on. If I want to give myself a $100 distribution sometime in 2016, how would that be done?

Would I simply debit the retained earnings account? And since I already paid income tax on the $100, where do I report that money on my personal tax return for 2016?

At the end of the year, net profits get moved to retained earnings.========>Matter of fact, On the terminology of S corp retained earnings, Asfaras I know, some say S corp has retained earnings while others say S corp does not have retained earnings but its earnings are reported in AAA;however, Just like regular corps, S corps NEED to distribute profits/earnings to their shareholders/owners, keep them as retained earnings actually in AAA. The difference is that the regular corp makes this decision after it pays corp income taxes. As an S corp, not subject to double taxation, doesn't pay corp taxes, but the owners/shareholders should pay all the taxes on the company's profit, no matter what the company does with that profit. If the company then distributes profits to the /owners shareholders, the distribution isn't taxable income (up to their stock basis. an S corp is exempt from federal income tax other than tax on certain capital gains and passive income)to the shareholders because they are already paying income taxes on the money. However, aslongas an S corp chooses to keep its earnings/profit as retained earnings in AAA, the shareholders still pay income taxes on the money. The business profits are taxed at individual tax rates on each shareholder's Form 1040So, retained earnings can become a problem for an S corp since onwers/ Shareholders get taxed on their percentage of the profits regardless of whether they actually receive any of those profits as a cash distribution from the company. it's a dollar that the shareholders are paying taxes on.


As the single shareholder of my S corp, I will personally pay income tax on all of the net profits, whether or not I actually receive the cash.======>Exactly.As said above; So to speak, your s corp may retains all profits considered as-if they were distributed to you, a SH. Thus an S-Corp you might be taxed on income you never received but is retained in your S corp’s AAA/basis. Whereas a shareholder of C-corp is taxed on dividends,NOT DISTRIBUTIONS UNLKIE AS AN S COPR, only when those dividends are actually paid out;

So, let's assume that my S corp has a net profit of $1000 at it's first year end on 12/31/15. ======>>Then the bal. in your AAA/basis(stock basis) ‘d go up by your profit of $100.Your contrition to the S corp does not increase the bal. in AAA

On 1/1/16, there will be $1000 in retained earnings that I already paid income tax on. If I want to give myself a $100 distribution sometime in 2016, how would that be done?===========>Then your distribution of $100 from the AAA/basis’s reduce the balance in AAA/basis from $1K to $900 and the distribution is NOT taxable; but the distribution does not reduce your AAA balance below zero. but the bal in your AAA can be either positive/negative, depending on the income/losses the corp has sustained.the distribution form you AAA is thought of as disbursing income that has already been taxed on your 1040 as you said.

Would I simply debit the retained earnings account? And since I already paid income tax on the $100, where do I report that money on my personal tax return for 2016?=======> When the s corp makes a distribution to you, you treat the distribution as a reduction ofyou basis in the stock.
Your J/E; Dr
Retained earnings 100

Cr
Cash 100
In this case, only Balance Sheet accounts are used. There are no Income Statement accounts involved.