I am the owner of a single-member LLC and am taxed as a pass through entity. At the beginning of the year is a pass through entity’s cash balance always considered $0 with respect to a balance sheet? How can a pass through entity maintain savings from a previous year’s profit? Hypothetically, if I pay a bill for the company on Jan 1 (i.e. before any profit is made) is this considered an additional capital investment?

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How can a pass through entity maintain savings from a previous year’s profit?

This is the concept of retained earnings. A corporation can pay out after tax profits to shareholders or retain them for future use, but they are taxed in either case. Same goes for you as a sole proprietor, you'll pay income tax and self-employment tax on the profits whether they are retained or not.

If so inclined, the sole proprietor would track money he contributed to the business initially and retained earnings in an Owner's Capital account, and track payments out from the business in an Owner's Draw account.

Since the distinction has no tax implication, many don't bother.

  • So is money in the Owner’s Capital account considered a distribution or, for example, would a distribution be moving the money from the Owner’s Capital account into a personal account the owner has? – Determinant Dec 6 at 20:06
  • It's really only a bookkeeping exercise if you choose to track distributions (Owner's Draw) vs retained earnings (Owner's Capital), from a tax perspective it all looks like business income so it doesn't matter. – Hart CO Dec 6 at 20:28
  • Thanks for all your help. From a tax perspective yeah, no difference, but I need to demonstrate success and profitability to a program via balance sheets and P&L statements and didn’t really know at what point the company’s money becomes my money. Again, super helpful answer. Thanks. – Determinant Dec 6 at 20:38
  • @HartCO - I generally agree but I wouldn't say there is "no tax implication", as there are some edge cases when draw amounts do matter. For example, with an s-corp tax rules, if you draw more than than the retained earnings+income (taking on debt), capital gains may be owed. Also, the existence of a "reasonable" salary compared to the distribution/draw amounts could matter during an audit. (I'm assuming if you didn't take a reasonable salary but left money in the capital account you'd be fine, but not if you draw it out.) – TTT Dec 7 at 5:27
  • @TTT True for S-Corps, but pretty confident there is no tax implication for a sole proprietor or single member LLC. – Hart CO Dec 7 at 17:06

No. You're confusing the functions of the Balance Sheet and the P&L.

Your P&L starts the year at zero, because it's an accumulation of credits and debits over the year.

Your Balance Sheet starts the year exactly where the last year ended, because it is a snapshot of where your assets and liabilities stand at a given point in time.

(Also though, given that you are taxed as a pass-through and presuming you're talking about US tax laws, the Balance Sheet is not very relevant to your tax situation. Schedule C only cares about line items on your P&L.)

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