[Question] Members Loan Accounts

[Nick.Roberts]

Morning

I require some accounting assistance.

I am doing the books of CC where the 2 members have sinced resigned.Leaving 2 remaining members. There reason for resignation was that the business was not performing at all and neither were they. However between the 2 of them they invested a sum of R400 000 over a period of 2 years. This money was used to finance the purchase of equipment used for the operating of the business.

I would like to know how i can account for this in my books.
Can I write off the members loan accounts,if so , how can this be done.

Any assistance will be greatly appreciated.

[sterne.law@gmail.com]

You say write off? Does this mena the members do not want any payout?

[Nick.Roberts]

Yes they will recieve no payout. between them they generated R7500 turnover over 2 yrs. They were the sales team ?
The 3rd member funded the monthly expenses of the business.
He is still a member and I have just joined. We have singed a deal with a company and are on the road to recovery.

[Justloadit]

mmmm interesting. I am not sure you can simply write it off with out some backup paperwork. There has been a an entry made which is a loan account to the members at some time, writing it off means the company has made a profit to the value of the loan accounts. I am not a company lawyer, but I would get legal advice on this. I would suggest that you get a signed letter from each member stating that they forfeit the loan account against the company not going after them to recover the loses. They can then also use this loss against their income of the current year the loss was made to reduce the tax that they pay. After all they did use money on which tax was paid when they made the investment, and incurring a loss does allow them them use this in their personal capacity for earnings in the year which the loan account was written off.

P.S. Once the company is liquid, they could come and claim their loan account if it is not correctly cleared..

[BusFact]

Writing off those loan accounts will have tax implications of some sort. This will require some professional advice from an accountant or tax consultant. My guess though, is that it could be considered as a donation from them to the company which will have a tax repercussion if not done correctly, or the loan account can be bought for a lower amount which will have capital gains tax implications. This is now getting complicated.

What ever route you end up going, make sure you have the agreements in writing. There are not many people who would walk away from R400k without a fight.

[Dave A]

I agree with the comments above that you are going to have to cover the legal angle.

From an accounting side, you would do best to convert the loan account into a capital contribution to the CC. This would mean the sum would be a capital loss in the hands of the contributing (ex) members and would not form part of taxable income in the hands of the CC.

A key issue is just how co-operative these resigning members are in walking away. A resolution of the members to convert the affected loan accounts to a capital contribution while they are still members would be very handy.

[Mel.Rustin]

I now have a question on writing off a Members Loan owing to the company....Is this allowed at all?

[clottering]

I have a similar problem with one of my clients. They were "given" a CC with a credit loan a/c, assets in the books and an accumulated loss. I can put through an entry to sell the assets to the original member and some how reduce the loan, but what are the entries to convert the credit loan to an equity loan if this member now resigned?
Thanks
Charles