How to Add Capital Contributions to an LLC

What are LLC capital contributions?

A capital contribution is an investment an LLC member makes in the LLC. When starting up an LLC, each member generally will make an initial capital contribution from their personal assets to help cover startup costs. There are no requirements as to how much this initial capital contribution must be, but it should, at the very least, be enough to cover the startup's initial operating expenses.

Capital contributions often play a role in the division of an LLC’s value among its owners. Depending on the terms of your business’ operating agreement, the amount of capital contributions made by each member can affect one or more of the following:

• The member’s ownership percentage
• The distribution of profits between members
• The member’s ability to vote on important company matters or the weight of said vote

The LLC operating agreement form often will detail a schedule of additional capital contributions that the members commit to making throughout the life of the LLC. If your LLC's operating agreement includes such terms, you will need to meet your commitment by making these additional capital contributions in the amounts and at the times stated in the agreement.

Every LLC is different, and how much funding is needed will vary widely from company to company. In many cases, members’ contributions will differ from each other in size and scope—many businesses have members who contribute more financially while other members provide knowledge, expertise, or other forms of value. An LLC structure allows for a great deal of flexibility in how these contributions are made, but no matter how you choose to structure them, it’s critical to outline these expectations in your business’ operating agreement.

Types of capital contributions

While capital contributions are often purely financial, there are actually many different types of capital contributions that can be considered when determining profit allocations and LLC member votes.

Cash

If your capital contribution will be in the form of cash, making the contribution is generally as easy as making out a check from your personal funds to the LLC. Capital contributions, however, also can be in the form of property or services.

Property

If you plan to contribute fixed assets to the LLC, which might include physical property like land, buildings, or anything else that can’t be easily converted into cash, you will need to obtain a market valuation to determine the value of these assets. Capital contributions in the form of property may also trigger a number of potential tax consequences, so it's generally a good idea to consult with a tax adviser beforehand.

Intangible Assets

Assets transferred to the LLC as a form of capital contribution do not need to be physical goods or equipment. Patents, contract rights, trademarks, or even simple agreements made in good faith can be considered capital contributions if the operating agreement outlines as much.

Services

You can also make a capital contribution in the form of specialized services like legal counsel, architectural services, or branding consultation. As with property, you will need to obtain a market value for your services. There are also tax consequences: You will have to treat this value as if it were actual income you earned for your services, meaning you will have to pay personal income taxes on the value of these services. Because of this, services are not as popular a form of capital contribution.

How to make a capital contribution

The process for making contributions to an LLC differs depending on the type of contribution being made. Cash contributions are relatively straightforward, while non-cash contributions typically require some additional research to establish their market value and their worth to the LLC. Regardless of what form a contribution takes, it’s critical to properly document the contribution to ensure your ownership percentage and benefits properly reflect its value.

Cash contributions

Cash contributions can typically be made by simply transferring the funds from a personal account to the LLC account. It’s important to remember that this type of transfer is not reversible—once you contribute the funds to the LLC, you cannot move the money back and forth freely between the business and your personal account.

Cash contributions are often made in accordance with regular contribution requirements outlined in an LLC’s operating agreement, although some operating agreements opt to structure contributions based on the LLC’s shifting needs rather than based on set time periods.

Non-cash contributions

When making a non-cash contribution, you’ll need to establish an accurate valuation of the assets being contributed. Depending on the nature of the contribution, this may require the assistance of an accountant, financial adviser, or subject matter expert. The values of some types of contributions can vary widely and might be contingent on financial projections or other fluctuating values. It’s important to take the necessary steps to assess your assets’ values before proceeding.

Accounting for LLC capital contributions

In order to properly track the amount of a member's contributions to the company and distributions from the company, each member of the LLC will have a capital account. This isn't a real bank account but rather an internally maintained notational account for the purposes of tracking the LLC’s business finances.

This account serves several purposes for the LLC.

Ownership percentage

The primary use of a capital account is to record the value of the member's percentage of ownership; if the LLC were to be dissolved, the amount in each member's capital account should reflect the amount that the member would receive after all debts have been paid.

In addition to the amount or value of your initial capital contribution, your bookkeeper will also use the capital account to keep track of any additional capital contributions you make throughout the life of the LLC.

Distributing profits and losses

The balance of the capital accounts will also be adjusted periodically to reflect the LLC's profits and losses. Such profits and losses are often shared among the members according to their membership percentages, but this isn't a requirement, and different percentages for the distribution of profits and losses may be used, so long as these percentages are contained in the LLC's operating agreement.

Individual distributions

Additionally, the capital account should be adjusted to account for any distributions that may be made from the LLC to the members. An individual member of the LLC wishing to make an owner’s draw from the business will typically be required to draw from their capital account to ensure they aren’t exceeding the agreed-upon withdrawal amounts.

Loan vs. capital contribution (LLC)

Sometimes an LLC requires more cash for its daily operations, or perhaps it needs additional funds to make an investment in some necessary equipment. If you don't feel up to making another capital contribution—and the terms of your operating agreement don't require you to at this particular point in time—you may want to provide the LLC with a loan instead.

There are a few key differences between a loan to your LLC and a capital contribution.

Loans

When making personal loans to the LLC, it's important to clarify that the money you are providing to the LLC is a loan and not a capital contribution that will affect the balance of your capital account. The best way to do this is with proper documentation.

The LLC should provide you with a promissory note that sets out the full details of the loan, including the amount of the loan, the terms of the loan, including the interest to be charged, and a repayment schedule or repayment date.

Capital contributions

Unlike a loan, a capital contribution will affect your ownership percentage, profit share, and voting rights per your operating agreement. It is also expected to be a permanent contribution to the business—there are no terms of repayment attached to a capital contribution as there are with a loan, and the business is not required to pay interest on the contribution.

FAQs

Are capital contributions taxable?

Capital contributions are typically not taxable, although certain exceptions may exist in cases where the member making the contribution is entitled to certain types of compensation for the contribution. Contributions of cash, property, intangible assets, and services with no associated debt on the LLC’s part generally are not taxed.

Do capital contributions need to be repaid?

No. Unlike a loan, a capital contribution is not paid back to the member by the LLC, and no interest is accrued based on the contribution made by the member.

Do I need to document capital contributions?

Yes, documentation is critical when making capital contributions to an LLC in order to ensure each LLC member receives the benefits to which their individual contributions entitle them. This is done through the use of a capital account for each member.

Does a capital contribution have to be a financial asset?

No, capital contributions come in many forms, and some LLC members may make only non-monetary contributions to the business. Everything from heavy equipment to industry knowledge to patents and trademarks can be considered a capital contribution as long as the business’s operating agreement allows for it.

Are capital contributions the only way to fund an LLC?

While many LLCs rely heavily on members’ capital contributions to raise money, there are many other sources of LLC funding available to supplement member contributions. Business loans, including SBA loans secured through the United States Small Business Administration, are available for many types of businesses. Some LLCs may also seek out angel investors or venture capital funding through venture capital firms.

Belle Wong, J.D. contributed to this article