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Sole proprietorship changed to S-Corp, does owners equity factor into the schedule L balance sheet?

taxguyak
Level 3

In schedule L the beginning retained earnings should be 0, but do I need to factor in the owner's equity from the Sole Proprietorship?  3-31-2020 the Sole Proprietorship changed to an S-Corp.  After that there were distributions of $600,000 which would make the ending retained earnings on schedule L a highly negative number.

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IRonMaN
Level 15

How would you get the balance sheet to balance without factoring the previous retained earnings somewhere into equity?  As a side note, I hope some wages came out before all of those distributions.

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qbteachmt
Level 15

"but do I need to factor in the owner's equity from the Sole Proprietorship?"

Only if there were assets contributed to the formation of the corporation, and what about some sort of stock price consideration?

In other words, if this person formed a corporation and put into it the Money already in the business bank account and a Vehicle or equipment or furniture, then, yeah, there is some sort of equity on hand at startup.

"After that there were distributions of $600,000"

Like the Ironman said...we saw someone on this forum mention a salary of $12k. They need to have issued payroll for "reasonable compensation," even if that distribution doesn't take RE negative. And how can it? They need to have made a ton of moolah for a distribution of that size (and it still shouldn't go negative), or did they get some financing and this person is taking all that money out personally?

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taxguyak
Level 3

I found out that the person making the balance sheet that I was using told me $600,000 was the cumulative distributions during the entire life of the business. So I need to get a better balance sheet to go off of.  The balance sheet also has Accounts Receivable while the business is on the cash basis.  They are using quickbooks.

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qbteachmt
Level 15

"The balance sheet also has Accounts Receivable while the business is on the cash basis. They are using quickbooks."

That's fine. Let's review a few points:

The transition to S Corp would be an "as of this date" event for Balance Sheet. It isn't the same business, so the start up financial data is not "from day 1" of the business. Make sure to understand the Business is not the Entity, but what the entity is doing.

So, if I form my corporation and contribute to it all money in the bank, any debt (such as AP) and AR owed to me by my clients, any office furniture or professional equipment, all of that is "as of" my Corporation starting date, because this is a new entity.

For QuickBooks, that person can provide the Balance Sheet on Cash Basis. And they need some guidance for starting the corporate books properly, and what I describe as "a feedback loop" for how the year ends. Once you work on credits and things like depreciation, you give them those final entries for that year.

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