Capital is needed in order for business owners to pay their operating expenses and make a profit. Common types of capital include money, real estate, equipment, and accounts receivable, but it can also be representative of the owner’s investment in the company or the accumulated wealth. A capital account is a ledger showing the difference between assets and liabilities, which is known as net worth. The structure of a business owner’s capital account is dependent upon the type of business they own.
The simplest structure belongs to sole proprietors who, by definition, own the entire business. Therefore, the ledger need only show the calculation of net worth with all the capital assigned to the singular owner because there are no other owner entities to consider.
Partnerships and limited liability companies have a more complicated structure. Before a person can join as an owner, they must make a capital investment. This investment in the business upon joining plays a big part in determining the owner’s net worth. It is determined, in part, by the partnership or LLC operating agreement and is calculated based on each owner’s capital share.
Shareholders in a corporation have an even more complex structure. In order to become a shareholder, potential owners must purchase shares or a percentage of the company. In return, they receive dividends and voting rights which are predicated on each shareholder’s percentage ownership or capital share.
The most complex structure belongs to S corporation owners. This account structure can become so complicated that it may require a professional accountant. S corporation owners are also shareholders, with a few differences. First, the account structure is actually more similar to a partnership. Second, S corporations can own other businesses, which means the capital account is not as simple as a one-person account.
Owners can make capital contributions of money, real estate, or other forms to increase their equity interest in the company. Assets need an appraisal when the contributions are made to identify the amount added to the owner’s account. Contributions, as well as withdrawals, can be performed on the account throughout the life of the business.
Regardless of the business owner’s account structure, which can vary greatly in complexity from one business type to another, there are ways to increase the capital ledger. In addition, depending on the accounting skills and financial knowledge of the owner, there may be more ways to add to the ledger than what has been discussed.