How to Add Capital Contributions to an LLC
A limited liability company, or LLC structure, is a popular form of business structure that’s used by many entrepreneurs and startup companies. As an entrepreneur or small business owner, you may be wondering about funding your LLC.
Funding for an LLC can come from a number of sources, with capital contributions from members being one of the main sources – and often the only source – of funding.
LLC Capital Contributions
A capital contribution is the term used to describe an LLC members investment in the LLC. When forming an LLC, each member will typically make an initial capital contribution; there are no requirements regarding the amount of this initial capital contribution, but it should be sufficient to cover the startup’s initial operating expenses.
The LLC operating agreement will frequently include a schedule of additional capital contributions that the members agree to make over the course of the LLCs existence. If such terms are included in your LLCs operating agreement, you must meet your commitment by making these additional capital contributions in the amounts and at the times specified in the agreement.
Forms of LLC Capital Contributions
If your capital contribution will be in the form of cash, it is usually as simple as writing a check from your personal funds to the LLC. However, capital contributions can also take the form of property or services.
If you intend to contribute property, you must obtain a market valuation to determine the value of the property you intend to contribute to the LLC. Property contributions may also have a number of potential tax consequences, so it’s always a good idea to consult with a tax advisor first.
You can also contribute capital in the form of services. As with real estate, you must determine the market value of your services. There are also tax implications, as you must treat this value as if it were actual income earned for your services, which means you must pay personal income taxes on the value of these services. As a result, services are not as common as a form of capital contribution.
Accounting for LLC Capital Contributions
Each member of the LLC will have a capital account in order to properly track the amount of a member’s contributions to the company and distributions from the company. This is not a real bank account, but rather a notational one for recordkeeping purposes.
A capital account’s primary purpose is to record the value of each member’s percentage of ownership; if the LLC is dissolved, the amount in each member’s capital account should reflect the amount that member would receive after all debts are paid.
Your bookkeeper will use the capital account to track any additional capital contributions you make throughout the life of the company, in addition to the amount or value of your initial capital contribution.
The capital account balances will also be adjusted on a regular basis to reflect the LLCs profits and losses. Profits and losses are frequently distributed among members based on their membership percentages, but this isn’t required, and different percentages for profit and loss distribution may be used as long as these percentages are specified in the LLC’s operating agreement.
Furthermore, the capital account should be adjusted to account for any distributions made by the LLC to its members.
Accounting for LLC Capital Contributions
Each member of the LLC will have a capital account in order to properly track the amount of a members contributions to the company and distributions from the company. This is not a real bank account, but rather a notational one for recordkeeping purposes.
A capital accounts primary purpose is to record the value of each members percentage of ownership; if the LLC is dissolved, the amount in each member capital account should reflect the amount that member would receive after all debts are paid.
Your bookkeeper will use the capital account to track any additional capital contributions you make throughout the life of the company, in addition to the amount or value of your initial capital contribution.
The capital account balances will also be adjusted on a regular basis to reflect the LLCs profits and losses. Profits and losses are frequently distributed among members based on their membership percentages, but this isn’t required, and different percentages for profit and loss distribution may be used as long as these percentages are specified in the LLCs operating agreement.
Furthermore, the capital account should be adjusted to account for any distributions made by the LLC to its members.
Loan vs. Capital Contribution (LLC)
So, you’ve made your initial capital contribution, but the LLC needs more cash for day-to-day operations, or perhaps it needs more money to invest in some necessary equipment.
If you don’t feel like making another capital contribution – and your operating agreement does not require you to at this time – you might consider making a loan to the LLC instead.
When making a loan to the LLC, it is critical to specify that the funds are a loan and not a capital contribution that will affect the balance of your capital account. The best way to accomplish this is through proper documentation.
The LLC should provide you with a promissory note outlining the full terms of the loan, including the loan amount, loan terms, including the interest rate, and a repayment schedule or repayment date.