I purchased an existing LLC with three partners in June. We converted it from a single-member LLC to a multi-member LLC. Per our operating agreement, we each have 25% interest (ownership) in the business. This is a small business. It had no loans or physical assets whatsoever. We purchased the business to get its name, contracts/vendors, and customers. We paid the previous single member and received all the cash in the bank account. I'm using Quickbooks Online. Here's the scenario: We paid $11,000 for the business to the previous single member.While we each have 25% interest, two of the four of us put in all the funds. We will be paid back through distributions (draws) from the LLC and the other two members will not receive draws until the two of us are repaid. This is all documented in the Operating Agreement.The bank account had a balance of ~$12K at the time. We left the funds in the account and changed the signers. Essentially the funds were transferred to us but they did not go anywhere. We used the same account but changed the signers with the bank.Questions:I initially logged the ~$12K bank account balance as a deposit and allocated it to Opening Balance Equity. Was this the correct way to note this amount? We did not physically"deposit" the funds ourselves but they were in the bank account from previous transactions so I treated them as if we deposited them.I am confused how to note Owner's Equity (Member's Equity) in this case. I have created four sets of accounts consisting of: Member's Equity, Member's Draw, and Member's Contributions. Each member has one of these sets of accounts. What is the correct way to enter the equity for each member? I currently have the transaction listed on the day after we bought the business as debiting $2,750 to each member's equity account and I have credited Opening Balance Equity for the $11,000 that we paid for the business. After doing this, the Balance Sheet shows $11,000 in Total Member's Equity and ~1K in Opening Balance Equity. Is that correct?

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Multi-member LLC Purchase and Equity Setup

Forum|Forum|6 years ago
December 15, 2019
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I purchased an existing LLC with three partners in June. We converted it from a single-member LLC to a multi-member LLC. Per our operating agreement, we each have 25% interest (ownership) in the business. This is a small business. It had no loans or physical assets whatsoever. We purchased the business to get its name, contracts/vendors, and customers. We paid the previous single member and received all the cash in the bank account. I'm using Quickbooks Online. Here's the scenario:

We paid $11,000 for the business to the previous single member.
While we each have 25% interest, two of the four of us put in all the funds. We will be paid back through distributions (draws) from the LLC and the other two members will not receive draws until the two of us are repaid. This is all documented in the Operating Agreement.
The bank account had a balance of ~$12K at the time. We left the funds in the account and changed the signers. Essentially the funds were transferred to us but they did not go anywhere. We used the same account but changed the signers with the bank.

Questions:

I initially logged the ~$12K bank account balance as a deposit and allocated it to Opening Balance Equity. Was this the correct way to note this amount? We did not physically"deposit" the funds ourselves but they were in the bank account from previous transactions so I treated them as if we deposited them.
I am confused how to note Owner's Equity (Member's Equity) in this case. I have created four sets of accounts consisting of: Member's Equity, Member's Draw, and Member's Contributions. Each member has one of these sets of accounts. What is the correct way to enter the equity for each member? I currently have the transaction listed on the day after we bought the business as debiting $2,750 to each member's equity account and I have credited Opening Balance Equity for the $11,000 that we paid for the business. After doing this, the Balance Sheet shows $11,000 in Total Member's Equity and ~1K in Opening Balance Equity. Is that correct?

QuickBooks Online

Best answer by Rustler

Thank you for the clear concise explanation of the events.

1. Yes, that entry is correct, OBE should show ~12K. Now you need to distribute it with a journal entry since there is no more opening balance entries.
debit OBE ~12K
credit partner 1 equity, ~3K
credit partner 2 equity, ~3K
credit partner 3 equity, ~3K
credit partner 4 equity, ~3K
You will need to adjust the amounts so that when finished OBE = 0, and from this point on make OBE inactive as it will not be needed again

2. The 11K the two of you paid, is basically a loan to the partnership, and that is how I would handle it.
Create liability account named for each partner, and an asset account called goodwill, then a journal entry
debit goodwill 11K
credit loan liability 5.5K partner 1
credit loan liability 5.5K partner 2

create a sub account of goodwill called something like goodwill amortization, and an expense account called amortization expense. At the end of the year do a journal entry
debit amortization expense for 1/15th of the amount
credit goodwill amortization for the same amount
goodwill is amortized over 15 years for the IRS

Repay the loan to the partners, this is not a draw.

RustlerAnswer

Thank you for the clear concise explanation of the events.

1. Yes, that entry is correct, OBE should show ~12K. Now you need to distribute it with a journal entry since there is no more opening balance entries.
debit OBE ~12K
credit partner 1 equity, ~3K
credit partner 2 equity, ~3K
credit partner 3 equity, ~3K
credit partner 4 equity, ~3K
You will need to adjust the amounts so that when finished OBE = 0, and from this point on make OBE inactive as it will not be needed again

2. The 11K the two of you paid, is basically a loan to the partnership, and that is how I would handle it.
Create liability account named for each partner, and an asset account called goodwill, then a journal entry
debit goodwill 11K
credit loan liability 5.5K partner 1
credit loan liability 5.5K partner 2

create a sub account of goodwill called something like goodwill amortization, and an expense account called amortization expense. At the end of the year do a journal entry
debit amortization expense for 1/15th of the amount
credit goodwill amortization for the same amount
goodwill is amortized over 15 years for the IRS

Repay the loan to the partners, this is not a draw.

N

NumbersHurtMyHeadAuthor

That is super helpful. Thank you. Responding to each below:

1. Done. I've made a journal entry to distribute the initial "deposit" as equity to the four members. OBE now says zero on the balance sheet.

2. I hadn't considered that $11K to be a loan but I guess that makes sense. Are you considering it a loan because we did not contribute funds to the LLC as would normally be the case? Instead, we provided funds to purchase the existing business for which we intend to be repaid. Questions:

A: That amount will potentially be repaid in full during 2020. Is it correct to amortize it over a period of 15 years if I expect the liability to be satisfied that quickly? It's not the intention for it to be a long-term loan.
B: If we do consider it a loan, and this is not a draw as you've indicated, what are the correct entries when making payments back to the two of us?

N

NumbersHurtMyHeadAuthor

Checking back if anyone has an answer to these latest questions, posed above:

2. I hadn't considered that $11K to be a loan but I guess that makes sense. Are you considering it a loan because we did not contribute funds to the LLC as would normally be the case? Instead, we provided funds to purchase the existing business for which we intend to be repaid. Questions:

A: That amount will potentially be repaid in full during 2020. Is it correct to amortize it over a period of 15 years if I expect the liability to be satisfied that quickly? It's not the intention for it to be a long-term loan.
B: If we do consider it a loan, and this is not a draw as you've indicated, what are the correct entries when making payments back to the two of us?

BizPro

Hello, you're on the right track!

Yes, each member should have a contribution account and a disbursement account. They can be names whatever makes the most sense to you.

The percentage of membership is important to record correctly, as well.

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