What are Capital Accounts?
There is not a topic we are asked about by our clients and passive investors more often than capital accounts. And for good reason, too. When an investor is looking at their K-1 and want to know what’s going on, they call the sponsor. And when the sponsor doesn’t know how to answer, they call us – their attorneys. This video from Gene Trowbridge, Esq. CCIM explains what sponsors, and their investors, should know about capital accounts.
[I]t’s one of the jobs of the managing member, to understand what’s going on in the capital account.-Gene Trowbridge, Esq. CCIM
Capital accounts are an essential part of syndication and crowdfunding investments. They track the capital that an investor has in an LLC, following IRS rules. As Gene Trowbridge, Esq. CCIM of the law firm Trowbridge Nieh LLP explains, “Every investor has a capital account that starts at zero. The capital account goes up when you make capital contributions. So if you invest $100,000, now your capital account is $100,000. In tracking your capital, your capital account goes down when you take capital out of your investment.”
How do Capital Accounts Work?
Capital accounts are affected by several factors, including capital contributions, capital distributions, taxable income, and taxable losses. When an investor makes a capital contribution, their capital account increases. When they receive a capital distribution, their capital account decreases. Taxable income increases the capital account, while taxable losses decrease it. At the end of the investment, there must be an adjusting entry to bring the capital account back to zero.
In syndication and crowdfunding, investors receive a K-1 form at the end of the year, which tracks their investment in the LLC. The K-1 shows the changes in the capital account, including capital contributions, capital distributions, taxable income, and taxable losses. It is essential for investors to understand their capital account and how it is affected by the investment’s results.
Trowbridge Nieh LLP is a law firm specializing in syndication and crowdfunding. They offer free 30-minute consultations to help investors understand their capital accounts and other aspects of their investments. Contact them today to schedule your free consultation.
