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.
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