22 Feb Capital Account

Capital Account

In a company taxed as a partnership, a capital account is an accounting record that tracks the equity stake of the partners. A partner’s initial capital contribution to the company is the first transaction that establishes the partner’s capital account. Additional contributions made by partners increase the partners’ capital accounts. The company’s profits and losses are allocated to each partners’ capital accounts pursuant to the agreement between the partners governing the partnership. Any distributions made to the partners will decrease the partners’ capital accounts. The amount of a capital account is the undistributed balance owed to each partner at the winding up of the company; however, the amount actually paid to each partner may differ than the capital account’s balance as the balance typically does not take into account changes in the market value of company assets. Capital accounts are used in multi member limited liability companies which are typically taxed as partnerships. Limited liability companies offer more flexibility than partnerships, including the ability to allocate capital and profits separately. Tracking capital accounts in these situations can be complicated and a limited liability company operating agreement needs careful drafting to account for potential unintended consequences to the members’ capital accounts.