Tilden Moschetti: One term you oftentimes see in private equity
funds documentation, or in documentation for syndications
is a term called capital account. So what exactly is a
capital account? And how do you use
it My name is Tilden Moschetti. I am a syndication attorney with
the Moschetti syndication Law Group. One of the things I
really enjoy most about my job not only is working with the law
and working with great clients, but I also get to work on things
in finance. So finance is another one of my passions, I
love studying it, I read finance books, even read accounting
books, because the two go hand in hand. So one topic that
oftentimes comes up lets me talk about it more than more than
ever, to my clients. And that is what does this term mean capital
accounts? So for example, a lot of times we talk about an
initial capital account for your members or for your investors.
What is that? Or what are these other accounts that are getting
set up? What is a capital account anyway? Well, let's
break it down. So capital obviously means money. So it
means cash. These are the cash accounts that we use in order to
manipulate things and our counts. We don't mean bank
accounts. That's an account specifically in a bank. When we
talk about capital accounts, we're talking about accounts as
it relates to accounting. So an account is just like a group of
grouping of funds that we can keep track of. So sometimes
you'll hear accountants talk about a chart of accounts, that
can be a list of different accounts. So you might think of
it as a budget item, like you have your mortgage and that goes
into your your mortgage, on your blog, excuse me on your budget
item. Or you think about groceries, you know, things like
that are are parts of your budget. for accounting purposes,
we talk about them as accounts. So it's that pool of money
that's set aside or that's segregated for a specific
purpose. So a capital account is that cash that separate aside
for a specific person, that each investor has a capital account,
so we keep track, if an investor invest $100,000, we logged log
$100,000 in their capital account, that's their initial
contribution, that is their initial capital account. Now
that money can come up or it can go down based on different
things that take place. If we make a distribution of a get as
a return of money, that can reduce the amount of their
capital account, that's we still I oftentimes still call the
initial capital account, even though it's not initial anymore,
but it's reduced that amount that they have cash that they
have as pure equity in their accounts. So I hope that's been
helpful. But let's talk about some key takeaways before we
leave for today. Key takeaways are capital accounts are those
accounts that keep track of the capital in the LLC that always
start at zero and are adjusted through those contributions,
distributions, taxable income and taxable losses. Both both
the company's capital accounts and the investors capital
account need to end at zero. So your final distribution at the
very end of the day should be zero. capital accounts are
oftentimes very confusing and keeping track of them,
especially in that first year. And especially if you have
different distribution periods for each investor. Some of my
investors like to only get distributions annually, some of
them get it quarterly. And it can get confusing on which is
which because we have to build different accounts. I also keep
track of a preferred balance account, which is an account
that keeps track of any monies that they've made that they
shouldn't be receiving because of a preferred return, but they
haven't received yet. And lastly, again, those cash
contributions, those cash distributions, reporting taxable
income and reporting taxable losses, all of those, they
impact the capital accounts. My name is Tilden Moschetti. I'm a
syndication attorney with the Moschetti syndication Law Group.
We can help you stay in compliance with the SEC, make
sure that everything's right. Keep your investors happy. All
those things. Start with a good legal framework. That's what
we're here for to make sure that we help you be successful as a
syndicator or a private equity fund manager.