A capital account reflects your stake in the partnership. The exact behavior of a capital account will vary depending on the form of partnership selected. This reflects how a capital account will behave in a general partnership with no special allocation provisions. A capital account starts with your beginning balance that you have in your capital account. Then any contributions you add will be added to that total, thus increasing the value of your capital account. Next any distributions taken reduce the value of your capital account. Next you add your share of the net profit/loss as determined by the partnership agreement and this will adjust your capital account accordingly. You will have to pay taxes on the income and may get to recognize the loss regardless of whether you take a distribution. This occurs because a partnership is a flow through tax entity. That will take us to the ending capital account balance at the end of the year.
It is very important to maintain these accounts accurately. This is extremely important when dissolving the partnership, as any remaining property is distributed according to these balances. Partner liability can also be determined along these lines assuming everyone has the ability to pay. Since limited partners generally can’t go below 0, they can end up owing more than that. Another important reason to maintain these properly is to keep the clear distinction between equity and debt as each has different rights associated with it, and can be handled in a different manner. A capital account represents the current dollar value of your stake in the partnership. As always good records make it easier to defend yourself when problems arise later. Often partners get involved in disputes involving these accounts. Our firm has extensive experience in resolving these disputes. Contact Attorney David. D. Daul or Warren Wanezek for a consultation.