S Corporation Capital Stock

[Dan]

Question: My question is if you are the only person involved with an S-Corp and you have $525 on your balance sheet as capital stock, can you change it to cash or retained earnings? If so how do you do that? What is the procedure? Thanks for responding. :)

[lbbwest]

The quick answer is no.

[Dan]

Question: What can you do with the capital stock in the S-Corporation? Thanks!

[Maribeth]

Question: What can you do with the capital stock in the S-Corporation? Thanks!

Can you be more specific about what you are trying to accomplish. Are you shutting down the corporation? Do you wish to take more money out of the corporation? ???

Maribeth

[kcjenkins]

Question: What can you do with the capital stock in the S-Corporation? Thanks!

Dan, the whole point of having Capital Stock is that this is money that has to be retained in the business. The only way you can reduce it is when you close out the corporation. That amount of assets is what lenders can rely on being retained in the business.

[Dan]

Maribeth & KC

No person has bought common stock in this S-Corp.

In the certificate of incorportion it states "the aggregate number of shares which the corporation shall have authority to allot is 1,000 which is divided into one class of common stock having no par value."

In my first post, I mentioned the idea of only one person involved with the S-Corp. There are no shareholders unless you would count the owner of the S-Corporation as a shareholder. Is the sole owner of the S-Corp. able to buy stock in his/her own S-Corp?

I think the reason I put money in capital stock (balance sheet) was to have a basis in the S-Corporation. I thought that in order for one to receive distributions from an S-Corporation he needed to have a basis in the S-Corp. The basis consisting of the shareholder's (owner) initial contribution to the S-Corp.

There are also retained earnings on the balance sheet. Question: Can one take a distribution if one only has retained earnings?

Maribeth-no the S-Corp. is not being shut down. If I was to take money out of the S-Corp. how would I enter that on the balance sheet? Would taking money out lower the capital stock? How do you put that on the balance sheet?

KC-If one was to close out the S-Corp. how would one deal with this capital stock on the balance sheet since it was put there by the owner? If you have an answer to other things I have mentioned in this post, I like your expert advice.

Thanks for your response. :)

[Terry D EA]

Dan,

It appears you are a little confused with some accounting terminology and procedures. As KC said, "Capital Stock" is "Retained Earnings" as a corporation asset. Common stock is either publicy or privately traded.

One owner could be a single shareholder. The shareholder's basis comes from his/her investement made either by investing cash or the value of any other fixed assets given to the corporation to conduct operations.

You should have a shareholders "Capital Account" and a shareholder's "Drawing Account". The shareholder can only make tax free withdrawls upto the amount he/she has invested which is the shareholder's basis in the corporation. A shareholder cannot take a dividend distribution if the corporation had a loss or if "Retained earnings" are not sufficient.

If the corporation is dissolved, all assets are to be distributed back to the shareholders which can be quite cumbersome with calculations when considering depreciation among other things. I hope this may have cleared things a little and not added any additional confusion.

Terry D.

[RoyDaleOne]

Wow, so much to say.

First, if there is no "issued" stock of the Corporation I would recommend that

this situation be "fixed". How did the Corporation become an S Corporation without

a Stockholder signing the S Election?

Because, the stock is no par stock you would setup one account for common stock.

This account would be what the shareholder "pays" for the common stock shares.

If nothing is paid for the stock then the account would be zero.

A "drawing account" on an S Corporation books is more correctly a called a

distribution account or dividends paid. This account is an equity account

and normally closed each year to retained earnings.

You should look at the ordering rules for S Distributions, if, I remember correctly,

the distributions are first charged against the current year profits.

If you can narrow your questions some I am sure someone can answer them for you.

[KEYWEST_RICKS]

"In my first post, I mentioned the idea of only one person involved with the S-Corp. There are no shareholders unless you would count the owner of the S-Corporation as a shareholder."

Wouldnt the sole owner have to also be the only shareholder? Seems a contridiction to say one person is the owner but doesnt own any of the stock?!? who owns the company is determined by who owns the shares of stock.

For $525 i wouldnt lose much sleep over it and just leave it on line 22 as capital stock if this is an on going concern. You can take distributions other than dividend distributions to the extent of your triple A account if you are wanting to get some cash out. Be sure you are paying reasonable officers wages though.

[OldJack]

If your client purchased shares of Ford Motor Company he would receive stock certificates or he would not own Ford Motor Company. The owner of a S-corp receives stock certificates or he does not own the S-corp.

The stock holder of the S-corp MUST pays something in cash or property for the stock certificates. This is usually the amount or partial amount that he initially invests in the S-corp bank account. It is sometimes temp recorded as a receivable due from the shareholder until paid.

If the S-corp has par value the shareholder must pay at least par value for the number of shares he issues certificates. If he pays more than par value for the number of shares it is shown on the balance sheet as line 1: Common Stock issued at Par $ [par value] and line 2: Capital Surplus or Paid-in-Capital $[excess amount over par]

If it is no-par value shares (your client) it doesn't matter how much he pays or the number of shares he issues. Of course he may not issue more shares than the state has authorized for the S-corp to issue.

The only time Common Stock Issued or Paid-In-Capital accounts are changed is if additional shares of stock are issued, shares are redeemed or the corporation is liquidated. You may not reclassify such accounts to anything but what they are.