Capital Accounts in LLCs and in Partnerships
In Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Robert W. Hillman and Mark J. Loewenstein, Editors (Edward Elgar 2015, Forthcoming)
FSU College of Law, Public Law Research Paper No. 700
FSU College of Law, Law, Business & Economics Paper No. 14-5
23 Pages Posted: 30 Aug 2014
Date Written: August 28, 2014
Abstract
Balance sheets for limited liability companies and for partnerships differ from corporate balance sheets in one important respect. Accounting for these alternative forms traditionally includes a separate equity account, or “capital account,” for each owner. Indeed, the statutory default rule of partnership law in most states requires that individual capital accounts be maintained and given economic significance on liquidation or buyout. LLC law does not. However, the federal income tax rules that apply both to partnerships and to most multi-member LLCs closely examine the maintenance and significance of capital accounts to determine the validity of special allocations of tax benefits. A fundamental understanding of capital accounts analysis is therefore important to understand accounting practice, potential state default rules and federal income tax compliance. Perhaps more importantly, capital accounts analysis is a powerful analytic tool to sharpen the understanding of the economic arrangement of the owners, particularly with respect to how and to what extent they have agreed to share different items of loss.
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