Learn what a capital contribution is and how it can be used to fund your limited liability company.
LLCs are a popular form of business, but, like any business, they need cash in order to run. Often that funding comes from the members making a capital contribution to the LLC. Let’s talk about this method of funding an LLC and how to go about it.
If you want to form a business for a product or service, consider creating an LLC. Standing for “limited liability company,” an LLC is a great place to begin if you want to start a business on your own or with others. This structure is intended to separate the owners’ personal assets from those of the business, thus protecting them if the business is sued or goes into debt.
Consider partnering with us to begin your startup LLC today! Keep reading to learn more about funding opportunities through capital contribution.
A capital contribution is simply a financial investment that an LLC member makes in the business. While each member makes some sort of contribution regarding start-ups, some contributions can be made continually down the line.
One example of capital contributions would be a donation from members. The first member may invest $60,000, whereas the second contributes $40,000. What does this mean? Well, it means there is $100,000 in the pool to begin the business. Many LLCs use this initial contributed capital to determine how much ownership, voting rights, and profits each member will have, but owning an LLC gives you the option to divvy those things up in whatever manner the members agree on in their operating agreement.
This contribution can be made in several manners, with one of the most common being cash. Other funding methods can include putting up property or even services as securities. These financial statements should be finalized and written down in your company’s financial records to avoid any issues down the road.
Instead of giving money outright to the LLC, the members may be able to give the LLC a loan from their personal savings. Of course, it’s important to keep detailed records of which members are loaning money to the LLC and for how much, as well as clarifying that it’s a loan that the LLC needs to eventually repay to the member and not a capital contribution.
The LLC will need to provide the appropriate paperwork to the member(s) for the loan, such a promisory note detailing things like the interest rate for the loan and the terms and dates for its repayment.
Determining your funding source is crucial as you form your LLC. As you have seen, capital contributions are one way to fund your business. However, there are several types of capital contributions that you should know.
The three main types of capital contributions include:
Adding capital contributions to an LLC can be confusing, but with a little guidance, it doesn’t have to be. Funding comes in several forms, such as cash, checks, loans, and more. Here are the steps for adding capital contributions to an LLC.
The first step to adding capital contributions is ensuring all the necessary forms are filled out correctly. After all, a capital contribution is a business transaction and deal. With that said, you must have proper documentation to protect yourself from liability in the event of an issue.
The second step would be to obtain the money. If you and/or the other members are contributing capital, it can be as simple as writing a check from your personal account to the LLC. If you’re seeking a bank loan or other means of financing your LLC, see our page on funding your business.
The third step is for you to get potential investors involved. Once you’ve obtained a certain amount of initial funding or financing, consider reaching out to other investors. This would mean knowing how much and what has already been contributed to your LLC.
When it comes to the first capital contribution, there are two different types of LLCs to consider. The first is a single-member LLC, and the second is a multi-member LLC.
With single-member LLCs, there is only one member — so what does this mean for contributions? Even though you won’t have to negotiate the initial capital contribution with other members, it’s still important to document the contribution and put it into a separate business bank account. Commingling business and personal finances could make it easier for someone to challenge the legitimacy of your LLC later, putting your personal assets at risk.
In a multi-member LLC, there are two or more owners. More members means a greater pool of resources to draw from when the members make their initial capital contributions.
The amount each member will contribute should be negotiated at the outset and documented in the LLC’s operating agreement. If the capital contributions have a bearing on the LLC ownership or how profits will be divided, that also needs to be established in the operating agreement.
In addition to an initial capital contribution, some LLCs establish ongoing contributions from the members at regular intervals. If that’s something you and the other members want to do, it’s important to put it in writing in the operating agreement.
As contributions are made, it can become stressful. Often when an LLC starts up, many contributions are made in short periods. With that said, keeping track of everything can get confusing. Therefore, when a contribution is made, it is important to document it appropriately, so you know where the money is allocated and which contributor loaned or gave the LLC the money.
If you are in the process of forming a single-member or multi-member LLC, you may be looking for assistance. Thankfully, there’s no need to stress: we can help you. With our many business services, we can help you manage and grow your company alongside our trained experts. We also have grant programs ready to assist you with funding. To get in touch and get started, call 844-493-6249 or visit our Start a Business page to begin!
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
You can make a “capital account” for each member of the LLC. Rather than a bank account, this is a financial record of each member’s contributions to the LLC. This would include not only the initial capital contributions, but the ongoing contributions of each member. Withdrawals and other activities can also be recorded in the capital accounts.
Unfortunately, capital contributions are not tax deductible when it comes to contributions toward an LLC.
A capital contribution is any sum of money contributed to an LLC or other business organization, usually one that would give the contributor a certain degree of ownership and/or control over the company.
While the total amount of original capital contributions should be enough to start, members can make more contributions along the way.
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