What Equity Accounts Should I Have for an S Corp. with Two Partners?

By Jeffry Olson, J.D.

What Equity Accounts Should I Have for an S Corp. with Two Partners?

By Jeffry Olson, J.D.

Before diving into the types of equity accounts you should have for an S corp., it's a good idea to understand what equity accounts are and what purpose they serve. Equity accounts represent the various assets you and your partners invest in your business. Because equity accounts reflect the assets of an S corp., keeping track of the value of your assets is critical both for tax purposes and to value the business at any given time.

Businesspeople chatting around conference table with papers and devices strewn on it

When you create a balance sheet for your S corp., the equity accounts are included. Further, equity accounts are included in the "statement of equity," which may also be referred to using another term, including the following terms:

  • An equity statement
  • A retained earnings statement
  • A statement of owner's equity
  • A statement of shareholder's equity

The Types of Equity Accounts Used in an S Corp.

In an S corp., the equity accounts include "paid in capital." This account refers to the amount of money a given partner to the S corp. has contributed to the business.

Net income, on the other hand, is another type of equity account. The net income account is referred to as "retained earnings." Basically, this account represents the company's earnings, excluding the money the partners have invested in the business. However, net income increases retained earnings.

Stock reflects capital received by the company from the shareholders in exchange for stock in the company. The partners receive stock in exchange for the investment into the company. Depending on how the company is structured, the stock may or may not come with voting rights.

Net losses refer to the losses that the S corp. has sustained during a given time frame.

Finally, stockholder dividends reflect the amount of money paid to individual stockholders by the company.

Why You Need Multiple Equity Accounts for an S Corp.

In an S corp., multiple equity accounts are necessary because each partner's investment and stock dividends must be represented separately. This is true because sometimes different partners invest different amounts.

Additionally, there is the matter of sweat equity. When one partner works the business, while the other partners perhaps invest only money, the time invested must also should be reflected in the equity accounts. Where a partner invests sweat equity for the opportunity to own a share of the business, the hours worked must be included in the books. These hours can be valued at an hourly rate, and the transfer of stock, at a predetermined value, in exchange for the hours worked can occur. However, this valuation of the stock, the valuation of the hourly rate, and the regular transfer of stock in exchange for hours worked must be detailed in the equity accounts as carefully as any other of the accounts.

The Consequence of Failing to Maintain Accurate and Complete Records

Maintaining records for each partner in an S corp. is essential to establishing each shareholder's ownership percentage in the company. As mentioned, accurate records are also important for S corporations for taxation.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.