How Do Capital Accounts in LLCs Work?

By Larissa Bodniowycz, J.D.

How Do Capital Accounts in LLCs Work?

By Larissa Bodniowycz, J.D.

Each limited liability company (LLC) owner, called a member, has a capital account that reflects their current monetary interest in the LLC. Capital accounts fluctuate during the course of the LLC's existence. When the LLC dissolves, capital accounts determine how much money each member should receive.

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Capital accounts are theoretical—not actual bank accounts. They track each member's equity in the LLC. The LLC should keep written records of each member's capital account as part of the LLC's bookkeeping. Spreadsheet programs such as Excel and accounting software are the most common methods of tracking members' capital accounts.

Calculating Capital Account Balances

Each LLC member's capital account begins with the member's initial capital contribution, or the amount the member paid into the LLC to start the company. Each time a member takes a distribution, or draws from the LLC, that amount comes from their capital account. At the end of each fiscal year, each LLC owner's share of the LLC's profit or loss affects the amount in their capital account. In the case of a profit, each members' share of the profit goes to their capital account, even if the company does not actually distribute funds to the LLC member. If the member makes an additional capital contribution, the LLC adds that contribution to the member's capital account.

It is easiest to understand capital accounts by considering a hypothetical example. If you are one of two 50/50 owners of Alpha Consulting, LLC, and you contribute $10,000 to help start the LLC, your initial capital account balance is $10,000. If you take a $2,000 owner draw, your capital account balance decreases to $8,000. If at the end of the first fiscal year, the LLC has $10,000 in profit, the LLC adds $5,000 to your account to reflect your share of the profits, and your capital account balance is $13,000.

Profits and Losses

By default, LLCs split profits among members in proportion to their ownership interests. Losses follow the same rules of allocation. For example, a member who owns 40 percent of an LLC has an allocation of 40 percent of the LLC's profits or losses. LLC members can deviate from these default rules at their discretion. To do so, they must indicate how to allocate profits and losses in the LLC's operating agreement.

Non-Cash Contributions

Capital contributions are often, but not always, monetary. LLC members can also contribute property to the LLC as part or all of their capital contribution. When a member contributes property as capital, the value of the property is added to the owner's capital account.

Capital Accounts When an LLC Ends

When an LLC decides to cease doing business, it must wind up its remaining business affairs and dissolve. As part of this process, the LLC must pay members the amounts in their respective capital accounts. If the LLC does not have enough remaining funds, it pays each member as much as it can in proportion to each member's capital account.

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