S Corp Balance Sheet Equity Section: Template + Example
- S Corp Expert
- Apr 24
- 6 min read
Struggling with the Equity Section on the S Corp’s Balance Sheet? I don’t blame you!
For many business owners (and their accountants, btw), the S Corp's equity section can be difficult to grasp. What exactly goes into the equity section of an S corp? How is it different from other business entities like LLCs or C corps? And how do you make sure you’re doing it right?
In this article, we’ll walk through the basics of an S corp balance sheet, and give you a clean, easy-to-follow S Corp balance sheet equity section template to help you get your books in order.
Should an LLC that elected to be an S corporation still have the same balance sheet as an S corporation?
Yes. When an LLC chooses to be taxed as an S Corp, it becomes a regular corporation for accounting purposes. This means its balance sheet—especially the equity section—needs to follow the same rules used by corporations. The IRS says this in the tax code, under IRC Section 1371(a). So, even if you’re legally an LLC, your books and your balance sheet should look like a corporation’s once you become an S corp for tax reasons. Forget about the whole LLC vs S Corp dilemma. Just think of the company as a corporation for accounting purposes.
Where is S Corp Equity on the 1120-S Tax Return?
On the 1120S tax return, you’ll find the equity section on Schedule L.
This is how Schedule L looks:
As we can see, the equity section includes the following:
Capital Stock (line 22) – This is the value of the shares the company has issued. It’s usually a small amount, like $1 per share, and often doesn’t change much since in most cases (but not always) capital stock reflects the initial investment of the shareholder into the company.
Additional Paid-In Capital (line 23) – This is extra money the owners have put into the company during the course of doing business. In most cases, these are deposits of cash made to avoid overdrawing the checking account. Paid-in capital could also be increased by out-of-pocket business expenses, for which the CPA might post a journal entry such as: debit expense…credit additional paid-in capital.
Retained Earnings (line 24) – This account reflects the cumulative net income that has not been distributed to shareholders. Its basic formula is: prior year retained earnings + current year net income − shareholder distributions. S corp retained earnings have their own quirks, and you can read more about that [here].
Adjustments to Shareholder Equity (line 25) – These are special adjustments made due to changes in accounting principles, corrections of prior period errors, or other reconciling items that affect equity but not current income. Per IRS instructions, these could include unrealized gains or losses on certain securities, prior year tax adjustments, or foreign currency translation adjustments. It's a catch-all line item that comes into play ONLY during significant accounting shifts.
Cost of Treasury Stock (line 26) – Treasury stock represents shares that were previously issued but have since been repurchased by the corporation. The cost of treasury stock is reported as a negative amount in the equity section because it reduces the total equity. For most small S corps, especially those with a single shareholder, treasury stock is uncommon, but the line is there just in case.
Internal Books vs. Tax Forms
In its instructions, The IRS calls Schedule L, “Balance Sheets per Books.” According to the Form 1120-S instructions, “The balance sheets should agree with the corporation’s books and records.” Well, the word agree doesn’t necessarily mean they have to be in the same order, right? The word “agree” leaves a lot of wiggle room, since it could mean that the top part of the balance sheet should equal the bottom part of the balance sheet and things should be consistent from year to year.
Your internal balance sheet can have the same balance sheet items rearranged in a different order (for example, retained earnings might not include distributions, and distributions could be stated separately. Or maybe capital stock isn’t shown separately. Or, capital stock and additional contributions are labeled “owner/partner capital” or “owner investment.” )
But as long as your assets equal liabilities + equity, it all balances. Schedule L can be reconstructed accordingly. It’s double-entry accounting, after all.
When Schedule L doesn’t match the internal balance sheet, some tax practitioners recreate Schedule L just for the tax return purposes. As a result, tax clients end up with two different balance sheets—one in their internal books and one for tax filing. It is confusing, but acceptable practice.
Some tax accountants take responsibility for accounting and adjust the client’s internal financials to match S Corp’s Schedule L. This approach makes tax preparation smoother and faster since the tax preparer doesn't have to spend time reconciling internal balance sheet to Schedule L year after year. Yet, if the S Corp has an internal accountant, they may have a different view on how things should be shown on the balance sheet.
Example of an S Corp Equity Section
Now let's get to the promised example. Let’s say you started your business by putting in $20,000. You issued yourself 1,000 shares at $1 each. That’s $1,000 to capital stock, and $19,000 to additional paid-in capital. Over time, the business earned $80,000 in profit and paid you $20,000 in distributions. $20,000 of distributions are "hidden" in Retained Earnings and do not show anywhere on Schedule L.
Your S Corp's equity section would look like this:
Account | Amount |
Capital Stock | $1,000 |
Additional Paid-In Capital | $19,000 |
Retained Earnings | $60,000 |
Adjustments to Equity | $0 |
Less Cost of Treasury Stock | $0 |
Total Equity | $80,000 |
Obviously, this $80K of equity should match this basic equation: Assets − Liabilities = $80K of Equity.
How to Reconstruct the Equity Section
As mentioned earlier, your Schedule L should generally follow your financial statements. But the simplest way is to get the asset side done first. Those numbers—especially if you don’t have a lot of them—should be fairly easy to obtain.
Note: these are book numbers, the “real-life” numbers not adjusted for tax. If it's cash in your checking account, it should match your 12/31 bank statement. If it's an asset, then you enter your book cost basis and depreciation per your internal financials, not per your tax software.
On the liabilities side, lines 16 through 21 (if you have any) should be easy to fill in. Capital stock and additional paid-in capital are also easy: they should reflect the money and/or assets you initially contributed to receive your shares. Treasury stock and adjustment to shareholder equity are rarely used items that are usually stay blank, especially for a single-shareholder company.
That leaves retained earnings (line 24), as the only variable. Or, as we accountants call it—a PLUG.
What if the Whole Equity Thing is Too Difficult to Figure Out?
If you’re not strong in accounting, or if your client’s books are just too messy and you don’t want to take responsibility for sorting them out, the IRS gives you an option to “hide” Schedule L. But only when the S corp’s gross income and/or assets are under $250K.
In that case, the IRS only wants to see two things: the S corp’s profit and loss (so they can calculate earned income) and the S corp’s basis numbers. For profit and loss, you can calculate it in Excel. For S corps basis, you can recalculate it using bank statements and prior K-1s.
Note: Recalculating S corp basis without a balance sheet is tricky and requires some accounting knowledge. That’s not the subject of this blog, so we won’t go into detail here.
Final Thoughts:
The equity section of an S corp balance sheet might seem like a maze at first glance—but once you understand what goes where and why, it starts to make a lot more sense. Whether you're dealing with capital stock, additional paid-in capital, or figuring out how you arrived at your retained earnings, the key is consistency and clarity.
And yes, as promised, here is your S Corp's Balance Sheet Equity Section Template. No gate emails. No forms. No “Subscribe to download.” Just straight-up value. You’re welcome.
And if you still have questions, please reach out! We've helped plenty of S Corp owners untangle their financial spaghetti. Please feel free to check out our services here.
