Hi! Some of the Members of our LLC are are doing labor on behalf of the company and we’d like to credit those labor hours (and monetary equivelent) toward their Capital Account (or equit). How would you recommend doing this? (I’m relatively new to Manager). Thanks! Jeff
Could the labor be inputted as an Expense Claim, which would get credited directly to their Capital Account?
Yes. This is likely the best way as well, since the expense claims will also show in the Capital Accounts Summary report.
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I do not think any of this deals with expense claims or whatever is proposed… Your company should invoice the customer, receive the payment and then pay the LLC member.
Realize that an expense claim is about money spend on behalf of the company and is not about labour. Nor is the LLC member an employee. In reality acts more like a consultant, so you collect the money and pay it out. Also in this way it will be recorded properly as income on the LLC member account.
This raises tax issues. Think about the situation in terms of a balanced double accounting entry.
The goal is to credit the capital account of the member. What will be debited? Normally it would be the bank account of the business. But no money is involved.
What sort of labor are these members providing, and for whose benefit?
The labor is administrative work and physical work, such as building infrastructure. The issue is the company is a startup and doesn’t have the money to pay upfront. So, we are hoping to credit labor hours/cost of labor towards equity. Thanks.
Thank you for the explanation, @jrhuling. I have several comments to offer:
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Since no money is changing hands, you should not use a sales invoice (which creates a receivable that must be satisfied by receipt) or payment in any way.
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You can use a journal entry to record such a transaction in Manager. Whether you should is a separate question. Credit the member’s capital account and debit an appropriate expense or asset account, depending on what is being done. For example, if the member performs administrative work, debit whichever expense account you would normally use for administrative salaries or expenses. If they build infrastructure that is a fixed asset, debit the fixed asset.
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Whether #2 is legally permissible is a question for a qualified accountant in your jurisdiction. Tax treatment of such in-kind contributions can be complex and is beyond the scope of this forum. Crediting of a capital account may still count as compensation to the member and may require withholding of taxes, reporting of income, and so forth. These issues are not trivial and should not be ignored.
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Valuation of labor hours may be problematic, especially when the type of labor performed varies significantly. Is a person’s labor worth the same when performing clerical work versus construction? How is the value to be rationally determined and justified? Again, consultation with a qualified accountant is mandatory.
In short, your idea seems like such a simple concept. But from a tax and accounting viewpoint, it is not.
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Deciphering your posts it seems that you started a new Limited Liability Company and I assume that each LLC member is a co-owner that should have invested their own capital (Capital Accounts) in the company. It seems they want to invest in kind by doing work for the company. @Tut already explained that you need to consult a tax accountant for reasons he mentioned.
Most importantly the members should realize that services are not as popular a form of capital contribution compared to cash and assets. Most LLC laws require that the company needs to obtain a market value for the value of the services be it administrative of physical, similar to when you would provide assets. There also are tax consequences, as the member will have to treat this value as if it were actual income the member earned for these services, meaning that they will have to pay personal income taxes on the value of these services.
The business maybe able to employ interested parties, accruing a contractor or employee liability but defer payment (to maintain cash flow). Arms length commercial rates would be required. The receiving party would then be liable for tax when the business paid them.
Agree with above comments that you need to see an account to clarify the business legal obligations.
My suggestion is that you record the hours worked as payables from the company. Record as the gross amount and let your founders deal with their own taxation position. The debt that is accrued by the company can then be removed by a Debt for Equity swap. You would Debit the liability account and Credit the Equity account.
As advised by the guys it is prudent to seek accounting and legal advice in your region