Shares held by stockholders of an S Corporation provide the balance in the company's ledger. The amount of outstanding shares plus liabilities held on the books should equal the amount of assets claimed by the company. Properly entering shares on your balance sheet as you sell them is important to maintain the integrity of your financial picture and company success.
The balance sheet is the tool used to reflect a company's financial health. It clearly shows assets and liabilities as well as details of all income and expenses, credits and debits as well as claims against the company assets. Creditors and investors utilize the balance sheet to gauge your risk level and value. An S corp, or subchapter S corporation, is a legal business entity formed by a group of shareholders that gives its investors limited protection. S-corp status is obtained through the Internal Revenue Service. While the company can act as a unit for certain legal matters, such as suing or being sued, the individual owners pay taxes in the same manner as owners of a partnership or sole proprietorship.
The cash received from the sale of stocks, or shares in the company, is recorded in the ledger as a debit to the balance sheet. The shares are then recorded under the credit line in the same books. Thus a $20,000 sale of shares is entered as a debit, offset, or balanced by the $20,000 credit when shareholders receive their stock certificates. Most S corporations are started in this manner, with the initial investments balanced by shares provided to investors.
An S corporation may buy back shares of the company from the stockholders to gain more control of the business. The transactions also work to offset each other on the balance sheet. For example, if the company buys $1,000 of stock back from shareholders, the entry is listed as a debit. The $1,000 credit to the number of shares outstanding is listed under the credit column and the balance sheet reflects the transactions that end up with a zero effect on the company bottom line. The buyback is not reported as income for the company, but instead reflects a balanced transaction.
As an owner of an S corp, creditors can attach a lien on your personal assets. On your balance sheet, you must clearly delineate how much you invested in the company and what portion of the assets is earned income. Because you are created as an S corporation, investors cannot rely on the company's bottom line for security against their investments. While shareholders in a corporation know that all the assets are available to pay out if they want to cash in their shares, investors in an S corp only can look to the company earnings for assurances of your business's liquidity. They need to see you are earning beyond your personal worth.
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