Recording Money to Start a Sole Proprietorship
If Amy Ott begins a sole proprietorship by putting money into her business, the sole proprietorship will debit Cash and will credit the Amy Ott, Capital. If Amy Ott also lends some money to the business, the entry will be to debit Cash and credit a liability account such as Notes Payable. (If Amy invests an asset other than cash, the business will record the cash equivalent or fair market value of the asset.)
Recording Money to Start a Corporation
If Amy Ott decided to form a regular corporation and invest cash in exchange for shares of the new corporation’s common stock, Cash will be debited and the account Common Stock will be credited. (If the common stock has a par value, Paid-in Capital in Excess of Par is also used.) If Amy also lends cash to the corporation, Cash will be debited and the liability account Notes Payable to Stockholder will be credited. (If Amy invests an asset other than cash, the corporation will record the cash equivalent or fair market value of the asset, unless the fair value of the common stock being issued has a more clear value.)
You should consult with your accounting and tax professional as well as an attorney regarding the type of business structure to be used and the pros and cons of investing versus lending to a new business.
