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Frequently Asked Questions

What is the difference between common stock and additional paid-in capital accounts in an S Corp?

Understanding the difference between common stock and additional paid-in capital accounts in an S Corp is crucial for effective business accounting. Both these accounts represent the total amount of capital invested into the business by each shareholder. However, they are distinct from each other as each shareholder should have a separate account for stock and another for additional paid-in capital. Common stock is issued at a nominal value and represents the initial capital invested by the shareholders. It's important to note that unlike a C corporation, which can have two separate stock accounts for common and preferred stock, an S Corp can only have one class of stock. Therefore, a single common stock account is sufficient. On the other hand, additional paid-in capital represents the excess amount that shareholders have invested over the nominal value of the common stock. This account is used to record the additional capital that shareholders have invested into the business beyond the par value of the shares. In an S Corp, the profits and losses are passed on to the owners, and the corporation itself is not taxed. The amount each owner must report is limited to the amount of capital they have invested in the business. This makes it essential for S Corps to maintain accurate records of all shareholder investments, including cash or property investments.
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