Who this is for
- Founders of a newly incorporated C corporation recording its first transactions
- New corporations, including ones that will elect S status, setting up equity and founder accounts
Not covered here
- How pre-incorporation costs are deducted in depth, and when business begins
- SAFEs, option pools and priced rounds
- 83(b) elections for vesting founder shares
- Form 5472 and withholding for founders who live abroad
- Books for an LLC
Which accounts does a new C corp need on day one?
A new corporation needs its own bank account and a few balance sheet accounts for what founders put in: common stock, additional paid-in capital, loans from shareholders and amounts owed to founders. Two more hold the costs of forming and starting the company. Most match a line of Schedule L, the Form 1120 balance sheet, which should agree with the books (Form 1120 instructions; Form 1120).
| Account | What goes in it | Schedule L line |
|---|---|---|
| Cash | The corporation's own bank account | 1 |
| Common stock | Shares issued times their par value (preferred stock has its own line) | 22b (22a) |
| Additional paid-in capital | What founders paid above par, and capital they add later | 23 |
| Loans from shareholders | Founder money lent on signed terms | 19 |
| Owed to founders | Costs a founder paid that the corporation will repay | A liability line that fits the terms |
| Organizational costs; start-up costs | Costs of forming the corporation, and of getting its business ready | 13a, if the books carry them as an asset |
| Retained earnings | Profit or loss since formation, less dividends | 25 |
A corporation's books are not an LLC's. Owners hold shares, so there is no "owner contribution" or "owner draw" account: every dollar a founder moves in is a share purchase, a loan or capital, and every dollar out is a repayment, pay, a loan to the founder or a distribution. Schedule L can be skipped when total receipts and year-end total assets are both under $250,000, but the return is still prepared from these accounts (Form 1120 instructions).
A case is not simple when a founder lives abroad, a founder pays for shares with code or other property, founder shares vest, investors are coming in, or months of activity ran through a personal account. Gather the certificate or articles of incorporation (it sets authorized shares and par value), bylaws, board consents, stock purchase agreements, IP assignments, any promissory notes, every receipt from before incorporation with proof of who paid, and bank and card statements from the first day.
What is the journal entry for issuing founder shares?
In a corporation, the founders' initial capital contribution is their share purchase: debit cash for what they pay, credit common stock with the par value of the shares issued, and credit additional paid-in capital with anything above par. Nothing goes to income: a corporation recognizes no gain or loss when it receives money or other property for its own stock (section 1032).
| Event | Debit | Credit |
|---|---|---|
| A founder pays the full price | Cash | Common stock (shares times par); additional paid-in capital (the rest) |
| Shares issued before the founder pays | Receivable from the founder | Common stock; additional paid-in capital |
| The founder pays later | Cash | Receivable from the founder |
Par value comes from the certificate or articles of incorporation, not from a software default, and the board sets the price. State law sets the floor. In Delaware, for example, shares with par value cannot be issued for consideration worth less than par, and the board may accept cash, property or another benefit to the corporation (Delaware Code title 8, sections 152 and 153). For stock without par value, a Delaware board may set how much of the price is capital (section 154); book the split its resolution states. Never record cash that has not reached the bank: an unpaid share price is a receivable from the founder.
Founder shares that vest carry a separate tax deadline: an 83(b) election is due within 30 days of the transfer (section 83(b)(2)). See founder shares that vest.
What if a founder pays for shares with IP or other property?
Record the property as an asset, credit common stock at par and the rest to additional paid-in capital. The amount the books use is an accounting choice to settle with whoever prepares the statements before booking; the tax figure is set by law. The exchange is generally tax free under section 351 when the founders transferring property, cash included, own at least 80% of the voting power and of each other class of stock right after it (section 368(c); Publication 542). The corporation's tax basis is then the founder's own basis, not the value (section 362(a)): code a founder wrote alone may have little basis even if the board valued it highly. If the books carry a different figure, keep the tax basis beside it for amortization. Shares given for a founder's work are not issued for property (section 351(d)): they are income to that founder, and they do not count toward the 80% the property founders must hold, so a founder who contributes only work can leave the others below it (26 CFR 1.351-1). The tax effects, including statements both sides may attach to their returns, are in startup costs before launch.
Is money a founder puts in later more capital or a shareholder loan?
Either can be right: decide which, put it in writing, then book it. Capital is credited to additional paid-in capital (or to common stock and paid-in capital if new shares are issued) and is not income to the corporation (section 118; Publication 542). A loan is credited to loans from shareholders and repaid on its terms.
| More capital | Shareholder loan | |
|---|---|---|
| Paper | A board consent, plus new shares if any are issued | A signed note: amount, interest rate, repayment date |
| Entry when the money arrives | Debit cash, credit additional paid-in capital | Debit cash, credit loans from shareholders |
| Getting it back | As a distribution: in a C corporation, a dividend to the extent of earnings and profits, then a reduction of the founder's share basis, then gain (section 301(c)); an S corporation follows section 1368 | Principal repayments reduce the loan; interest is recorded as interest expense |
| What the founder holds | A larger investment in the shares | A creditor's claim |
The label alone does not settle it. The factors the tax law names include a written unconditional promise to pay a fixed sum on demand or by a set date with fixed interest, whether the debt ranks behind other creditors, the debt-to-equity ratio, convertibility into stock, and whether loans track shareholdings. How the corporation labels the money when it is issued generally binds the corporation and the holder, but not the IRS (section 385). A founder loan with no interest, or interest below the applicable federal rate, can fall under the below-market loan rules (Publication 542). If the corporation uses the accrual method and a founder owns more than 50% of its stock by value, directly or indirectly, it generally deducts interest owed to that founder only when the interest is paid (section 267(a)(2) and (b)(2); Publication 542).
The common mistake is booking every founder transfer as an "owner contribution" with no decision behind it, which leaves the return preparer guessing. In an S corporation, a shareholder's loan raises its own basis questions; see shareholder loans to an S corporation. A founder abroad who lends or buys shares may bring Form 5472 and interest withholding; see putting money into your US corporation from abroad.
How do we record startup costs paid personally before incorporation?
Record each cost with its original date, payee and amount, debiting the cost account and crediting either "owed to founder", if the corporation will repay it, or additional paid-in capital, if the founder contributes it. Then sort it: organizational costs and start-up costs are separate pools, each with its own first-year deduction, so give each its own account.
| Cost paid before incorporating | Category | Tax treatment |
|---|---|---|
| State incorporation fees; legal work on the charter, bylaws, organizational minutes and original stock terms; necessary accounting | Organizational (section 248; 26 CFR 1.248-1) | Up to $5,000 in the year business begins, reduced by costs above $50,000; the rest over 180 months |
| Market research, consultants and travel to investigate or set up the business | Start-up (section 195) | Up to $5,000, reduced by costs above $50,000; the rest over 180 months |
| Paying developers to build software, and other research | Neither: research costs, software development included, are not start-up costs (section 195(c)(1); section 174A(c)(3)) | Under the research rules; see startup costs before launch |
| Commissions, legal and printing costs of issuing or selling shares; costs of transferring assets, such as an IP assignment, to the corporation | Neither (26 CFR 1.248-1(b)(3)) | Not deducted as an organizational cost |
| Equipment the company keeps, such as a laptop | Neither: start-up costs cover only amounts a running business could deduct (section 195(c)(1)) | Recorded as an asset |
The remainder of each pool is deducted evenly starting with the month business begins, which may not be the incorporation date (section 248(a); section 195(b)). A domain name or website is not among the regulation's examples of organizational costs (26 CFR 1.248-1(b)(2)); give it its own account so its treatment can be settled on the facts. The start-of-business date, how the deduction is claimed on the return and repayment routes are covered in startup costs before launch.
How should the first bank deposits and card charges be booked?
Open a bank account in the corporation's name and run every corporate dollar through it. The IRS tells new businesses to keep the business account separate from personal accounts, deposit all receipts there, note on each deposit whether it is business income, personal funds or a loan, and reconcile the account (Publication 583). In a corporation, founder money is a share purchase, capital or a loan, booked as above, never as sales.
- First deposits: match each to its paper: a stock purchase agreement, a note, a board consent or a customer invoice.
- A founder's personal card used for company costs: record each expense on its date and credit owed to founder. When the corporation repays, debit owed to founder; the repayment is not a second expense. If the founder works for the corporation, repaying costs of that work, such as travel, stays tax free only when receipts and the business purpose reach the corporation within a reasonable time; otherwise it is wages (26 CFR 1.62-2). See business expenses on a personal credit card.
- Personal bills: never pay them from the corporate account. A founder's personal cost is not a corporate expense; how such a payment is then treated is in C corporation paying owner expenses.
- Monthly: reconcile the bank and card accounts to the books.
If personal and corporate money are already mixed, see fixing commingled business and personal funds.
Cash or accrual, and which tax year: what to decide before the first entry?
Both are fixed by the first return: a corporation adopts its tax year and its accounting method by filing its first return with them (Publication 583). A corporation electing S status instead elects its tax year on Form 2553, and is limited to a calendar year or a few permitted fiscal years (Form 1120-S instructions). Changing either later generally needs IRS consent, so set the books up on the method the return will use. The other rules below are from the accounting methods and accounting period sections of the Form 1120 instructions.
| Decision | Rule for a C corporation |
|---|---|
| Cash or accrual | A new C corporation can usually choose either. Cash is allowed while average annual gross receipts for the 3 prior tax years, or the years it has existed, stay at or below $32,000,000 and it is not a tax shelter, or if it is a qualified personal service corporation (substantially all its work is services in fields such as health, law, accounting or consulting, and substantially all its stock is held by the employees who perform them); otherwise a C corporation must use accrual (section 448). |
| Books and return | Taxable income is figured on the method regularly used to keep the books, and it must clearly reflect income. |
| Tax year | Calendar or fiscal year. A personal service corporation (mainly services in fields such as health, law, accounting or consulting, performed by its employee-owners) must use the calendar year unless an exception applies. |
Which method fits is in cash or accrual for a small business; year-ends are in fiscal year or calendar year.
What records should a new corporation keep from day one?
Keep the corporate papers that prove who owns what, beside the receipts behind each entry. The IRS says a corporation should keep minutes of board meetings, and that supporting documents such as invoices, receipts, deposit slips and canceled checks back the books and the return (Publication 583). Except in a few cases, the law requires no special kind of records, only ones that clearly show income and expenses (IRS). One exception: a corporation that files Form 5472 (below) must also keep the related-party records its rules require (Form 5472 instructions).
| Record | What it proves |
|---|---|
| Certificate or articles of incorporation, and bylaws | Authorized shares, par value and who may act |
| Board consents or minutes | Each share issuance and price, founder loan and reimbursement |
| Stock ledger | Each holder's name, address and shares, and every issuance and transfer |
| Stock purchase agreements, IP assignments, promissory notes | What each founder paid or lent, and on what terms |
| Receipts for costs paid before incorporating | Amount, date, payee and who paid |
| Bank and card statements from the first day | Every entry in the books |
State corporate law governs the stock ledger; Delaware, for example, defines it as the record of stockholders' names, addresses and shares and of all issuances and transfers (Delaware Code title 8, section 219(c)). Records that support the return are usually kept for 3 years from the due date or the filing date, whichever is later, and records of the corporation's basis in property for as long as they are needed (Form 1120 instructions). See how long to keep business records.
When should a new corporation hand its books to a bookkeeper?
No rule requires a bookkeeper; the IRS requires books that clearly show income and expenses and support the return (IRS). The work grows at these points:
- Investors arrive. A SAFE, a convertible note or a priced round adds equity entries that must tie to the cap table; see bookkeeping for a venture-backed startup and recording a priced round.
- Payroll starts, including a founder paid as an employee; see setting up payroll. A founder who controls payroll and willfully fails to pay over the tax withheld from wages can owe it personally (section 6672); the IRS generally has 3 years from the following April 15, or the later filing date, to assess it (IRM 5.7.3); see trust fund recovery penalty.
- The first Form 1120 is due. Every domestic corporation not exempt under section 501 files, whether or not it has taxable income, generally by the 15th day of the fourth month after year-end (Form 1120 instructions); an S corporation files Form 1120-S a month earlier (Form 1120-S instructions); see first corporate return for a pre-revenue startup.
- A foreign person, such as a founder who is not a US citizen or resident, owns at least 25% of the vote or value, directly or indirectly. The corporation then files Form 5472 for reportable transactions with that owner, and failing to file or keep the records carries a $25,000 penalty (Form 5472 instructions).
What help typically costs is in bookkeeping cost per month.
Example
These examples are illustrative and use US dollars.
Two founders buy shares at par
Two founders each buy 5,000,000 shares of common stock at $0.0001 par for $500, and both pay at signing. Entry: debit cash $1,000; credit common stock $1,000. The price equals par, so nothing goes to additional paid-in capital, and nothing goes to income. Had one founder paid a week later, the corporation would first debit a $500 receivable from that founder, then clear it when the cash arrived. Had the board priced the shares at $0.001 each, each founder would pay $5,000: debit cash $10,000; credit common stock $1,000 and additional paid-in capital $9,000.
Formation costs repaid in month two
Before incorporation, a founder paid $1,200 of state filing fees and legal fees for the charter and bylaws. Entry when the corporation takes them on: debit organizational costs $1,200; credit owed to founder $1,200. In month two the corporation repays: debit owed to founder $1,200; credit cash $1,200. The repayment is not an expense. If business begins that year and these are its only organizational costs, the whole $1,200 is within the first-year limit for organizational costs.
A founder loan with a signed note
In month three a founder wires $20,000 under a signed note with a stated interest rate and repayment date. Entry: debit cash $20,000; credit loans from shareholders $20,000. Interest is recorded as interest expense; a principal repayment reduces the loan and is not an expense. Without a note or a board consent, the same wire needs a decision, loan or capital, before it is booked.
Different for you?
- Your company is an LLC: see setting up books for a new LLC and does a new LLC need a bookkeeper.
- You will elect S status: see S corporation bookkeeping and should you elect S corporation status; set the books up with bookkeeping help.
- A founder lives abroad or funds the company from abroad: shares or a loan, Form 5472 and withholding are in putting money into your US corporation from abroad; set the books up with bookkeeping help.
- A founder paid for shares with code or other property: the basis and statements are in startup costs before launch; record it with bookkeeping help.
- Founder shares vest: see founder shares that vest.
- Investors, SAFEs or an option pool are coming: see bookkeeping for a venture-backed startup; record them with bookkeeping help.
- A relative lent the company money with no paperwork: see family loan to your business.
- The first Form 1120 is due with no revenue: see first corporate return for a pre-revenue startup; get the books ready with bookkeeping help and the return with corporate tax help.
- Months of transactions are already unrecorded or mixed: see catching up on overdue books and get bookkeeping help.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Form 1120 test for skipping Schedules L, M-1 and M-2 Both total receipts (page 1, line 1a plus lines 4 through 10) and year-end total assets must be less than this amount; Schedule K, question 13. Latest final Form 1120 and instructions are for tax year 2025. | $250,000 Tax year 2025 | IRS: Instructions for Form 1120 Checked |
| Section 83(b) election filing deadline After property transfer; the recipient elects using Form 15620 or a compliant written statement. Weekend and holiday rules apply. | 30 days | IRS: Form 15620 Checked |
| Section 351 control share At least this share of total voting power and of the total number of shares of each other class, immediately after the exchange | 80% | US Code: section 368(c) Checked |
| Stock-value ownership threshold for section 267 related-party interest deduction timing Direct or indirect ownership of the corporation's outstanding stock value by the individual; section 267(b)(2) | More than 50% | US Code: section 267(b)(2) Checked |
| Maximum immediate deduction for qualifying organizational costs Separate from the start-up expenditure deduction; reduced, but not below zero, when organizational costs exceed the phaseout threshold | $5,000 | IRS: Publication 583, Starting a Business and Keeping Records Checked |
| Organizational cost threshold that reduces the immediate deduction The immediate organizational cost deduction is reduced by qualifying organizational costs above this amount | $50,000 | IRS: Publication 583, Starting a Business and Keeping Records Checked |
| Start-up and organizational cost amortization period Remaining qualifying start-up and organizational costs, beginning with the month the business begins | 180 months | IRS: Instructions for Form 1120 Checked |
| Maximum immediate deduction for qualifying start-up expenditures Reduced, but not below zero, by start-up expenditures above the phaseout threshold; applies when the active business begins | $5,000 | U.S. Code: 26 U.S.C. § 195(b)(1)(A) Checked |
| Start-up expenditures threshold that reduces the immediate deduction The immediate start-up deduction is reduced by qualifying expenditures above this amount | $50,000 | U.S. Code: 26 U.S.C. § 195(b)(1)(A) Checked |
| Cash-method gross receipts test for corporations and partnerships Average annual gross receipts for the 3 tax years before the current one, for tax years beginning in 2026 (section 448(c)); aggregation rules apply. Same figure as us.inventory.small-business-gross-receipts-limit, kept separate for the cash-method rule. | $32,000,000 Tax year 2026 | IRS: Rev. Proc. 2025-32, section 4.30 (Internal Revenue Bulletin 2025-45) Checked |
| General trust fund recovery penalty assessment period From the succeeding April 15 for timely employment tax returns, or actual later filing; exceptions apply | 3 years | IRS: Trust fund recovery penalty assessment period Checked |
| Usual Form 1120 filing deadline A corporation with a June tax year-end generally uses the 15th day of the third month instead; weekends and holidays can move a deadline | 15th day of the fourth month after year-end | IRS: Instructions for Form 1120, When To File Checked |
| Foreign ownership that makes a US corporation a Form 5472 reporting corporation At least this share of vote or value held by one foreign person, directly or indirectly, at any time in the tax year. A single-member LLC wholly owned by one foreign person is treated as such a corporation. | 25% | IRS: Instructions for Form 5472 Checked |
| Form 5472 penalty for failure to file or keep records For tax years beginning after December 31, 2017. Per reporting corporation, per tax year. A substantially incomplete Form 5472 counts as a failure to file. IRC 6038A(d)(1); Treas. Reg. 1.6038A-4(a). | $25,000 | IRS: Instructions for Form 5472 Checked |
Primary sources
- 26 U.S.C. 1032, Exchange of stock for property
- 26 U.S.C. 351, Transfer to corporation controlled by transferor
- 26 U.S.C. 368(c), Control defined
- 26 U.S.C. 362, Basis to corporations
- 26 U.S.C. 118, Contributions to the capital of a corporation
- 26 U.S.C. 385, Treatment of certain interests in corporations as stock or indebtedness
- 26 U.S.C. 267, Losses, expenses, and interest with respect to transactions between related taxpayers
- 26 U.S.C. 6672, Failure to collect and pay over tax
- 26 U.S.C. 301, Distributions of property
- 26 U.S.C. 1368, Distributions (S corporations)
- 26 U.S.C. 248, Organizational expenditures
- 26 U.S.C. 195, Start-up expenditures
- 26 U.S.C. 174A, Domestic research or experimental expenditures
- 26 U.S.C. 448, Limitation on use of cash method of accounting
- 26 U.S.C. 83(b), Election to include in gross income in year of transfer
- 26 CFR 1.248-1, Election to amortize organizational expenditures
- 26 CFR 1.351-1, Transfer to corporation controlled by transferor
- 26 CFR 1.62-2, Reimbursements and other expense allowance arrangements
- IRS: Internal Revenue Manual 5.7.3, Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty
- IRS: Revenue Procedure 2025-32, inflation adjustments for 2026
- IRS: Publication 583, Starting a Business and Keeping Records
- IRS: Publication 542, Corporations
- IRS: Instructions for Form 1120
- IRS: Form 1120, U.S. Corporation Income Tax Return
- IRS: Instructions for Form 1120-S
- IRS: Recordkeeping
- IRS: Instructions for Form 5472
- Delaware Code, Title 8, Chapter 1, Subchapter V: Stock and Dividends
- Delaware Code, Title 8, Chapter 1, Subchapter VII: Meetings, Elections, Voting and Notice
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.