Capital Structure

Capital Structure

Before you set up an LLC, you need to determine its financial structure as well as a plan for future expansion.

There is no hard and fast rule as to how much capital you should put into a limited liability company. The more you assign as capital, the more you have at risk in the business. Therefore, you may want to deposit as little as possible. Keep in mind that if the company is sued, and the company has few assets, a court might decide that the company was undercapitalized and find you personally liable for company debts, just as it could for a corporation. Also, there could be tax problems with not counting enough of your contributions as capital or for contributing appreciated property. These matters should be discussed with a tax specialist.

If you are starting a small business that does not need a lot of expensive equipment, a few thousand dollars would be a safe amount with which to start. If you do need to buy expensive equipment, and the company can borrow the money from a third party to cover it, you would probably be safe as well. However, if you need to purchase expensive equipment and personally loan the money to the company rather than contribute it as capital, you should weigh the risks of a lawsuit and consider consulting an attorney or accountant who specializes in business startups.

One thing to keep in mind is that if you do not put in the amount of capital you state in your initial agreement and are later sued or file bankruptcy, you may be required to come up with any unpaid amount because it may be considered an unpaid debt to the company. That is something you could be held personally liable for. A judge may even use it as a reason to void the limited liability of the LLC.