How Do Capital Accounts in LLCs Work?

Limited liability companies, or LLCs, are a common type of business structure. LLCs are owned by members and each member has his own capital account.

Purpose

Capital accounts in LLCs track each member's initial contributions to the LLC in terms of capital. Capital accounts are also used to track additional capital contributions made by members.

Basics

Capital accounts have normal credit balances. When amounts are placed into the account, the account is credited. When an amount is deducted from the account, the account is debited. Each member has his own capital account and the balance in the account represents that owner's capital balance. If the LLC dissolves, the capital balances are paid to the members if there are funds left after paying all the business debts.

Details

Contributions made to capital accounts can be in the form of money or other assets. Members contribute property or equipment as a form of capital. When this occurs, all members must agree on a fair market value of the asset. That amount is placed in that member's capital account. Profits and losses are also reflected in each member's capital account. Profits and losses of an LLC are divided in terms of ownership percentage. This information is described in the LLCs operating agreement.

References

• Simplicity Law: What is a Limited Liability Capital Account and What do I do with it?
• My LLC Agreement.com: What is the Role of Capital Accounts in the LLC Operating Agreement?