1. Money
Jean   Murray

What Is a "Capital Contribution?" How Does It Work?

By August 30, 2011

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I received a question from a new business owner; she is setting up a limited liability company (LLC) and the attorney asked her what her "capital contribution" would be.  She said, "What is that?  What do I tell him?"  Here is another one of those terms that bankers and CPAs and attorneys know about, and they assume that business people know this stuff too.  But if you are just starting in business, you may not have heard this term.

What is Capital?
First, you need to know what the term "capital" is.  Capital is assets and cash in a business.  Capital can be cash, or it can be equipment or accounts receivable, land or buildings. Capital can also represent the accumulated wealth in a business, or the owner's investment in a business.

What is a Capital Contribution?
A capital contribution is an owner's contribution of assets (usually cash) into a business.  When you start a business, you will have to put in money to get it going.  This money is your capital contribution.  You might also contribute other assets, like a computer, some equipment, or a vehicle that will be owned by the business.

Why is a Capital Contribution Important?
For several reasons:

  • When you start a business and want a bank loan, the bank likes to see that you have invested in a business.  If the owner has no stake in the business, he or she can walk away and leave the bank holding the bag.
  • If you are starting a business, you should figure on putting something in to get started.  You may need to take out a personal loan to get the money to put into the business.  This is working capital, which is money to keep going until the business starts to pay its own bills.
  • In an LLC, the owner's capital contribution should be recorded.  The laws regarding LLCs say that an owner's liability is limited to the amount of his or her capital contribution.  So you can't lose more than you have put in.

A Personal Example
When I started my business in 2003, I made a capital contribution of $500.  But I have put money into my business at various times along the way.  And sometimes I have taken money out of the business to put into my personal checking.  If the business is doing well, I take money out; if the business needs cash, I put money in.  The amount of my capital contribution is changing all the time.  My accountant keeps track, and he notes at the end of the year what the balance is in my capital account.  That's the amount I have invested in the business, accumulated over time.

For More Information

How to Start a Limited Liability Company (LLC)

How to Prepare a Business Loan Proposal

Comments
March 11, 2012 at 11:29 am
(1) Brian says:

I’ve heard a lot about capital contributions when you’re starting a business, but I’d really like to know more about capital contributions after several years.

As an owner, am I allowed to contribute money to my LLC without it being a loan? If not, this is a HUGE disadvantage of an LLC.

March 12, 2012 at 10:46 am
(2) biztaxlaw says:

LLC members can make capital contributions to the LLC at start-up and at other times, as long as the operating agreement allows for these contributions. The operating agreement is key to how capital contributions work. See this article on LLC member contributions for more information.

April 16, 2012 at 3:30 pm
(3) DB says:

Is there a difference between contributing money to an LLC, and loaning that same amount of money to an LLC, as it pertains to the liability of the LLC member making the contribution or loan, considering that the total liability of the LLC member is limited by law to their contribution?

In other words, which is better for limiting LLC member liability, a cash contribution, or a loan? Are there other considerations that shift the advantage/disadvantage of either cash contributions or loans?

April 17, 2012 at 8:15 am
(4) biztaxlaw says:

The answer to “which is better,” as usual is, “It depends.” There are significant tax consequences to loaning money vs. investing money in any type of business, including an LLC. The difference with an LLC depends mostly on the operating agreement and what types of member transactions/loans are allowed.

It’s best to consult a tax attorney AND a CPA to consider all the options. The tax attorney can help you with the paperwork to make the transaction and can advise you on whether your operating agreement and how a loan or investment affects your membership share, while your CPA should know your tax situation and how the transaction might affect your personal taxes.

Here’s an article that explains in more detail the implications for loaning money to your business vs. investing money in your business.

May 24, 2012 at 8:48 am
(5) TS says:

Thank you for this very helpful overview. What are the implications for someone starting an LLC as its sole member, who may choose to invite additional members in the future? Should that possibility affect my choice of initial capital contribution at all, or is it only the total amount I put in over time that will matter with regard to establishing my ownership share?

October 10, 2012 at 10:35 pm
(6) PF says:

Can I contribute capital into my business (C corp.) to reduce prepaid expenses? I know that personally this is not the best, but it would improve the bottom line of my company.

October 11, 2012 at 6:01 pm
(7) SNYLLC says:

Consider the following facts:

You are the sole member of an LLC.
You have contributed $5,000 to the LLC.
You have also loaned $10,000 to the LLC.
This $15,000 has been spent by the LLC.

A few years later the LLC is sued (for whatever reason).

Assuming no additional loans and or contributions have been made to the LLC, Is the LLC liable for only the $5,000 contribution that was made?

May 14, 2013 at 8:47 am
(8) Sam says:

I am part owner of a private company, there are 4 people that own 100% of the company. We are short on cash and need to do a capital contribution. 2 out of 4 shareholders say they can’t contribute. What are the rights of the 2 shareholders that can contribute?

November 6, 2013 at 3:33 am
(9) Amelia says:

I’m an accountant for an LLC company, Share ownership was A(35%), B(35%) and C(30%). Let’s say Paid-in capital was $100,000 but C contributed $500,000 to get the 30% ownership. How will it be presented in the balance sheet. Should it be under Shareholder’s current account for the excess?

Thank you.

December 9, 2013 at 1:10 pm
(10) john says:

Need help.

I am a 50% owner of an LLC. I put $5,000 as an initial capital contribution. The company is now able to pay it’s own bills. Am i allowed to pay myself back for the $5,000?

December 10, 2013 at 8:37 am
(11) biztaxlaw says:

I am not an attorney and I am not offering you legal advice. Check with your attorney on the consequences of withdrawing your share of an LLC. If you have an <a href=”http://biztaxlaw.about.com/od/glossaryo/g/operatingagree.htm”>LLC operating agreement </a>, see what it says about withdrawing capital contribution. If you take out your money, does that leave the other owner as the sole owner? Do you want to retain your ownership? If you don’t have an operating agreement, discuss with the other owner then put any agreement IN WRITING!

January 7, 2014 at 2:17 pm
(12) Elizabeth says:

If you own an LLC (no share holders) and you contribute money to start the business it goes under Owner Contribution. My question is when the owner takes money out of the company does that go under paid in capital or owner contribution? Also if the owner adds more of their personal money in as times goes is that still considered owner contribution?

January 16, 2014 at 7:30 pm
(13) Jordan Crist says:

My partner and I started a small lawn service (LLC) this year, and as part of our agreement, she is “contributing” part of her personal vehicle to get the company going (as part of her capital investment) and to use for normal business operations. Can we, in fact, count this as a capital contribution? If so, how would we do that? If not, where would we denote this “contribution”? I am assuming it would be a deduction of some kind (under Section 179 on Form 1065?

January 17, 2014 at 8:20 am
(14) biztaxlaw says:

There are two ways to look at this – from an accounting viewpoint and from a tax viewpoint. For accounting purposes, record the <a href=”http://biztaxlaw.about.com/od/glossaryf/a/fairmarketvalue.htm”>fair market value</a> of the asset, then show this amount in her partner account as a capital contribution. The tax side is much more complicated. Best check with your tax preparer or tax advisor.

February 20, 2014 at 4:29 am
(15) sharon G says:

How do I transfer the ownership of an asset, such as a classic car, or art, into an LLC? Is there a form? I am not concerned about the ‘value’ but am adding a degree of protection from my personal property.

Thank you….

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