Making Personal Investments in our Business

Chris Harris

Hi,

I need some advise on best practices.  We use Quicken Home & Business in which I track both our personal finances and the finances of our small multi-member LLC's business (a boutique).  Everything is in one (1) data file, but we do have separate accounts and separate categories for our personal and our business finances.  Everything is pretty well segregated, although it could be better.  However, I'm not ready split the file into two separate files quite yet.

I currently have two basic ways I'm trying to track this.

Way #1:  I have a Tag for "Business - Personal Investment".

Way #2:  I have a specific category for this that's located in the Business Income Categories.  Here's the rough layout.

   >Business ~ Income
         >>Gross Sales (Biz)
   >Business ~ Loan or Investment
         >>Personal Investment (Biz)



My problem:  Because some of the investments were transfers directly between our personal checking and our business checking, I wasn't able to enter a specific category in the register.  Instead, I used the [Account Name - Ending 1234] in the Category column to get the transfer to occur.  Because everything is in one (1) file, this is viewed as a transfer between accounts and when I run the Profit and Loss Statement report, it's missing several thousand dollars of personal investments...all of them transfers between accounts.  I know I can tweak the "Advanced" report settings to show/hide transfers, but that hasn't really done anything useful.

My question:  How specifically should I track when we "invest" personal money into the business?  I need to report this with our taxes yearly.

Tom Young

First off, I wouldn't be using an income Category for your investments in the business, I'd use balance sheet Accounts. Certainly these transactions are neither income to the business nor expenses to you.  Secondly, if it's really important that the business activities be kept distinct from your personal activities, (i.e., you're not simply filing a Schedule C for the business that's part of your own income tax return),  then running two Quicken files is the way to go.

I'm not sure I'm completely understanding what's going on here.  Since you are making a distinction between Checking Account to Checking Account transfers and something else, (assumed to be instances where you pay some business expense out of a "personal" Account), I'm guessing that the more "typical" accounting for such investments is along the lines of:

Debit (decrease) Personal Investment (Biz) Category $XXX
Credit some "personal" Account (e.g., credit card)    $XXX

and now you're puzzling over the direct Account to Account transfer where the accounting is:

Debit (increase) Business Checking Account   $XXX
Credit (decrease) Personal Checking Account  $XXX

?????

There's no reason why you can't "swing" that dollar amount through the Personal Investment (Biz) Category by simply making the entry as:

Debit (increase) Business Checking Account            $XXX
Credit (increase) Personal Investment (Biz) Category $XXX

Debit (decrease) Personal Investment (Biz) Category $XXX
Credit (decrease) Personal Checking Account           $XXX

Quicken reports can easily distinguish "inflows" and "outflows" in that Personal Investment (Biz) Category, if that's important.

As I said, I'm not sure I'm entirely understanding your issue and if I've missed the mark here, post some additional information.

Scooterlam

Chris Harris said:

Hi,

...My question:  How specifically should I track when we "invest" personal money into the business?  I need to report this with our taxes yearly.

Here is my reporting approach to track both member contributions (investments) to the business and member distributions (draws) from the business. 

BTW, I am a single member LLC, taxed as a sole proprietor running a very simple services business.  My personal accounts and business accounts are in the same Quicken file.  YMMV.  Perhaps this reporting approach can work for your multi-member LLC as well. 

I track both LLC member's contributions and member's distributions through 2 custom reports where: 

• In my business checking account(s) register (where I deposit member contributions, distribute member profits and deposit business gross receipts and pay business expenses)...I use the Category field to reference the personal account(s) that is the contribution funding source or make distribution deposits.  I use the memo field with keywords "Member's Contribution" or "Member's Distribution", along with any appropriate description. A source of potential error in reports, I know.   And, I continue to use my business name in the Tag field.

• I then setup 2 custom reports using a Banking>Transaction standard report as a basis.   I assign my business checking account(s) in the Account tab.  I assign my personal checking account(s) in the Category tab.  And, in the Category>Memo Contains field, I assign the above mentioned keywords based on the type of report.  Finally, I save them off in my business folder.  See image.

• I run both these reports for the current full year as well as earliest to date and they become part of my LLC "annual meeting" review and book.  

volvogirl

I'm I'm confused.  You said it's a Single Member LLC reporting on Schedule C in your personal tax return.  A Single Member LLC would not have any members.  You don't track contributions or withdrawals or personal investments on your tax return.

Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.  

Chris Harris

@Tom Young

Thanks for your assistance.  I'm really new to business bookkeeping and don't understand double-entry accounting, which is what I think you're talking about.

You said...

First off, I wouldn't be using an income Category for your investments in the business, I'd use balance sheet Accounts.

If I understand you correctly, you're saying to create a separate account where I'll enter a CREDIT (increase) anytime I make a personal investment in our business and a DEBIT (decrease) anytime I take money out.  Essentially, I'd duplicate the actual transaction (the one that clears the bank) in this new account which isn't really linked to anything.  While the actual transaction in my bank account would be a ?DEBIT / CREDIT? (I'm not sure which one), the transaction in this account would be the opposite.  Technically, it doesn't have any money in it, it is just the record of our owner's equity in the business.  Is this correct?

If so, when I click on Add Account, what type of Account do I select?

• Personal Cash Account
• Personal Assets
• Personal Liabilities
• Business Accounts Receivable (AR)
• Business Accounts Payable (AP)

Could you provide a little more insight or correct me where I'm wrong?

Thank you again!

YingDave

@Chris Harris
Suggest you find your favorite Tax accountant and run through how to set it up from the outset as it will get harder to redo things in time. If you are a sole trader it will probably only take a couple of hours to cover the basics of setting it up the right way. @volvogirl is correct you are not an employee. But the authority on the matter is your accountant.

When you start up a business you are making an investment of capital from your personal account account to a business you set up. You may want to create a Business 'Other Asset' account. You may buy equipment on your personal account for the business or transfer cash to it (owners equity). If it is enduring it becomes an asset. That would be entered as a funds transfer from your checking/credit card into the business asset account. If it is not enduring like stock you are going to sell it is categorised as a business expense (not a transfer)*. When you take money back out it's not salary it is "Drawings". Again in Quicken it would be entered as a transfer back out from the business account to your personal account. This is not strictly what double entry book keeping means. So again see if you can get a couple of hours with an accountant to learn what is expense and what is capital according to tax rules and what the right setup its for your business.

In Quicken any account in the list can incl. Credit card, checking and asset can be contained within the business if indeed you set it up separately. See dialog below and any account you have by hitting Ctrl+Shift+E you can 'move' the account to display under the business on the Account bar by specifying the option below - but this just moves the display. 

*[ yes I know stock is in fact a current asset - but that just complicates everything].

Tom Young

I made a guess at what your accounting problem was and since you haven't said whether my guess was correct or not, I'll assume that my guess was right and the problem boiled down to the (apparent) inability to use your "Personal Investment (Biz) Category" for a direct transfer of cash between your personal checking Account and your business checking Account.

My answer was that you break the one transaction (cash moved from one Account to another Account) into two transactions:

Debit (increase) Business Checking Account            $XXX
Credit (increase) Personal Investment (Biz) Category $XXX

and

Debit (decrease) Personal Investment (Biz) Category $XXX
Credit (decrease) Personal Checking Account           $XXX

As an aside I mentioned that I'd substitute an Account for the Category you're using.  Since all this activity is happening inside one Quicken file it really doesn't matter what kind of Account you'd select to use here.  Pick any Account that seems to make sense to you.

IF this kind of transaction was accounted for in two files - which kinda seems like it should be, though that's not clear - THEN accounting would be along the lines of:

PERSONAL FILE
Debit (increase) Investment in Business Account    $XXX
Credit (decrease) Personal Cash in Bank Account   $XXX

BUSINESS FILE

Debit (increase) Business Checking Account          $XXX
Credit (increase) Owner A's Equity Account             $XXX

It seems like you've been using your "Personal Investment (Biz) Category" as some kind of substitute for the two accounts of "Investment in Business" and "Owner A's Equity Account" and if that's the case, well that just doesn't work very well. 

If your real world situation is that the business activities get reported on a Schedule C in your income tax return, then there's no need for the use of accounts like "Investment in Business" and "Owner A's Equity Account" because it's all your money, all your assets, liabilities , income and expenses.

If your real world situation is that the business files a separate income tax return then it makes more sense to account for that activity in a separate file, and if this is a situation where there are multiple members, Quicken isn't really suited for that because it has no provision for the multiple equity Accounts that are needed.

Chris Harris

@Tom Young

You're correct, my problem as best I understand it is an inability to consistently track our personal investments using the "Personal Investment (Biz)" category.  I've tried using a combination of categories and tags, but both methods don't work overly well when it comes to direct transfers between my Personal Checking > Business Checking.  That's where this statement of yours comes in I guess.

It seems like you've been using your "Personal Investment (Biz) Category" as some kind of substitute for the two accounts of "Investment in Business" and "Owner A's Equity Account" and if that's the case, well that just doesn't work very well.

Could you give a little more detail on this?  Is the Owner A's Equity Account tied to an actual, separate checking account?  Or, is it more along the lines of an account that doesn't have a real world counterpart; more of a log of transactions than an account? 

BUSINESS FILE
Debit (increase) Business Checking Account          $XXX
Credit (increase) Owner A's Equity Account             $XXX

For the business, we do file a 1065 which passes through to our personal taxes.  We're a multi-member LLC, but it's my wife and I so we don't care about tracking equity individually.


Thank you @YingDave.  I'll have to read yours again.  Hopefully, we'll be able to set down with an accountant at some point, but we don't really have the funds for that at present.

Tom Young

"Could you give a little more detail on this?  Is the Owner A's Equity Account tied to an actual, separate checking account?  Or, is it more along the lines of an account that doesn't have a real world counterpart; more of a log of transactions than an account? "

It's the latter.  On the balance sheet of a partnership or Sub-S Corporation each partner's or shareholder's equity must be tracked separately because of the "pass-through" nature of these organizations.  I cribbed this from a TaxSlayer page.  It's speaking here about partnerships but it's equally applicable to Sub-S Corps. 

---------------------------------------------------------------------------------------------------------------

A Partnership Capital Account is a distinct account that shows the equity in a partnership that is owned by specific partners. This account typically exists as an item that is shown in a business’s financial and accounting records rather than as an actual bank account, although this depends on business practices. Businesses may choose to create separate partnership capital accounts for each partner or combine all partners into one account, with separate notes on the various assets, contributions, and distributions attributable to each partner
---------------------------------------------------------------------------------------------------------------

Quicken gives you no access to any equity-type of Accounts so you either have to track that information inside Quicken using Liability Accounts or you keep some sort of record outside of Quicken about activities that affect each partner's or shareholder's equity.

"For the business, we do file a 1065 which passes through to our personal taxes.  We're a multi-member LLC, but it's my wife and I so we don't care about tracking equity individually."

If you live in a community property state and otherwise meet the requirements you could treat the LLC as a "disregarded entity" and avoid having to file a Form 1065 altogether, though having filed in the past as a partnership you might be stuck.  Seeing a local pro about all this probably is money well spent.

Chris Harris

@Tom Young

Thank you.  Knowing that it's more a log than a linked account certainly helps me understand how the account is used.

I created a "Bus. Owner's Equity Account" using a liability account type, identified it as business-related, and entered a few test transactions.  I don't know if you can see this screenshot very well, but does this look roughly correct to what you're saying?

• Should the balance in the owner's equity account really be negative?
• Should I add a Category to the transactions in the owner's equity account?

Tom Young

You didn't follow through on my original suggestion whereby transfers of money from your personal checking account to your business checking account "swung-through" whatever Category or Account you were using.  Instead of:

Debit (increase) Business Checking                     $40
Credit (increase) Bus. Owner's Equity Account      $40

and then

Debit (decrease) Bus. Owner's Equity Account      $40
Credit (decrease) Personal Checking                     $40

(which would zero out the Equity Account) you made entries of:

Debit (increase ) Business Checking                     $40
Credit (decrease) Personal Checking                     $40

and

Debit  (no Category or Account)*
Credit (increase) Bus. Owner's Equity Account      $40

(* Since Quicken is a "double-entry accounting program "one-sided" transactions have an offset into the unseen "equity" account.)

You seem to be stuck halfway between the originally proposed accounting (where you used only one offsetting Category or Account) and the accounting where two Accounts are used for these sort of transactions: one Account on the "owners" side showing an increased (or decreased) investment in the business and the Account on the "business" side showing an increase or decrease in the owner's equity.

You can't attach a Category to the amounts posted to the Bus. Owner's Equity Account because that money (presumably) hasn't been spent yet and when it is spent the business' entry will be

Debit (increase) some Category                       $40
Credit (decrease) Business Checking Account  $40

You need to choose how you want to track this information - either all going through one Account, which will require some analysis, or through two Accounts, which is the better approach in my opinion.

Chris Harris

@Tom Young

I do want to go through two Accounts like you recommend in your last paragraph.  Is this set of transactions more correct?  The Balance now comes out to $0.  If I understand you correctly, that is ultimately the goal.



Is there ever a reason that the balance in this pass-through account should intentionally be left with a positive amount...similar to a Savings Goal or something like that?

I'm sure it will make sense over time, but right now, the Increase/Decrease seem to be reversed in my thinking.  It seems like when you pass money into the Account, it would increase it and when you pass money out of the Account it would be a Decrease.  That's probably just me not understanding business accounting yet.

Thank you so much for your insight and help!

Tom Young

No, you're not going through two Accounts in your example, you're only using one Account as the "other side" of the cash transfer. 

You, personally, are using this one Account as the offset for your "cash out" entry, and then your business - an entity entirely distinct from you - is using that same Account as the offset for its "cash in" entry.

Since your business is a separate entity from "you", you need to keep track of your investments in the business, and the business for it's part has to keep track of your equity in the business.  From your original post it appears that you've always tried to keep track of these two things using the one Category of "Personal Investment (Biz)", and what you've done here is substitute one Account (Biz Owner's Equity) for the Category you previously used.

As I said originally, you can use the one (Category/Account) to track the two different things (your investment in the business vs. your equity in the business) but when it comes time to do your two distinct tax returns - one personal, one business - you have to analyze your entries to really figure out "what's the right number?"  Let's see if an example can make this clearer and the example we'll start with a brand new business where you take $1,000 out of you bank account and deposit in the new business' bank account.

Debit Biz Owner's Equity Account                       $1,000
Credit (decrease) Personal Checking Account    $1,000

Debit (increase) Business Checking Account     $1,000
Credit Biz Owner's Equity Account                       $1,000

(Since the Equity Account could be either an asset or liability account I've omitted the "increase/decrease" notations.)

The balance in the Biz Owner's Equity Account is now $0.

Next, you spend $100 using your personal credit card for supplies for the business.

Debit Biz Owner's Equity Account                        $100
Credit (increase) Credit Card Liability Account   $100

The business recognizes these supplies as a current expense.

Debit (increase) Supplies Category                   $100
Credit Biz Owner's Equity Account                   $100

The balance in the Biz Owner's Equity Account is now $0.

The business performs a service for a client and receives $750 as revenue.

Debit (increase) Business Checking Account     $750
Credit (increase) Service Revenue Category       $750

You decide to move $200 from the Business Checking Account to your Personal Checking Account.

Debit (increase) Personal Checking Account   $200
Credit Biz Owner's Equity Account                    $200

Debit Biz Owner's Equity Account                 $200
Credit Business Checking Account                $200

Finally, it's year end so the business closes out its profit ($650) to the Biz Owner's Equity Account.

Debit (decrease) Net Profit Category*       $650
Credit Biz Owner's Equity Account             $650
(*There's no such Category.  It's just easier then reversing the two Categories used in the example.)

But of course you've got to recognize and pay the taxes on the $650 profit passed through to you even though your didn't get all that in cash. 

The balance in this Account from all this activity is $650, but that's not your investment in the company nor is it your equity in the business.  In order to get that number now you have to do some analysis of that activity:

You contributed $1,000 in cash, you incurred a business expense of $100 on your credit card, you too $200 cash out of the business, and you paid taxes on the company's $650 profit, even though the cash is still in the Business Checking Account.   Stir that all together and your investment in the business is $1,550 and the business shows your equity at the same $1,550.

This was a super easy example with only a few entries, with a business that has cash as its only asset and with only one owner. 

Using two Accounts to keep track of activity - an "Investment in Company" asset Account on the "personal" balance sheet and an "Owners Equity" liability Account for the "business" balance sheet - should pretty much eliminate the need for "analysis" to get to the numbers (if you do your accounting correctly) and it would make even more sense if the business activity and personal activity were in separate files.

I really don't know enough about your "real world" situation to make specific recommendations.  Getting some local professional help might very well be money well spent.

Chris Harris

@Tom Young

Thank you so much for that master lesson!  After reading your reply and example multiple times, I think I'm going to stay with the one (1) "Owners Equity" liability account for awhile until I learn more about double-entry accounting and am ready to separate the file.

Your statement of "If you do your accounting correctly" is the key since I don't know enough yet about it to not mess it up majorly.

It is interesting to think about the idea that the personal "Investment in Company" account would be a personal asset (the business owes us) while the "Owners Equity" would be the flip of that, a liability to the business - who separate from us.  I never thought of that, but now it makes sense why you recommended a setting it up with a liability account.

Thank you again.