How to Add Capital Contributions to an LLC

By Larissa Bodniowycz, J.D.

How to Add Capital Contributions to an LLC

By Larissa Bodniowycz, J.D.

Capital contributions are usually made at the beginning of an LLC's life and then throughout its existence. The process is conducted according to the operating agreement or members' desire to contribute. Contributions are added to the LLC by following the usual rules for transferring ownership of the type of contribution being made and then properly recording the contributions on the contributing member's capital accounts.

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Understanding Capital Contributions

A capital contribution is a transfer of money or other assets, such as property, from an LLC owner to the LLC itself. The largest capital contributions from owners are usually made when the business first starts. These early contributions, called "initial capital contributions," are crucial to the LLC's success because, without contributions, the LLC is just a shell entity with no property or money to operate.

The LLC's operating agreement typically records the amount of LLC owners' initial capital contributions and sets out any rules related to future capital contributions. For example, some LLC operating agreements require that owners, also called members, make future capital contributions to the LLC in preset amounts.

After the initial contributions, unless the LLC's operating agreement provides otherwise, LLC members can usually elect to make capital contributions at any time, even if contributions are not required.

Transferring a Capital Contribution to the LLC

Once contribution forms and amounts are decided on, the contributing member must actually transfer the assets to the LLC. For monetary contributions, this is rather straightforward: funds can be transferred from the member's personal bank account to the LLC's bank account just like any other transfer of money.

Property contributions are a little trickier. For titled property, such as vehicles, the contributing member must transfer the title to the LLC. For property that does not have formal title documents, such as certain intellectual property rights, the member must still formally transfer the property to the LLC, usually by way of a contract, to ensure there is a record that the LLC now owns the property.

Recording the Capital Contribution

Money or other assets that have been transferred to the LLC as capital contributions must be recorded as such. This recordkeeping step is important to ensure that the contributions are treated accordingly. For example, members can also make loans to the LLC, so failing to properly record a monetary transfer can create future confusion over whether it was a loan or capital contribution.

Capital contributions are recorded as additions to the contributing member's capital account, which is not an actual bank account but rather a record of a member's ownership interest in the LLC. The capital account shows how much the member would receive if the LLC were to end, assuming the LLC has sufficient funds at the time of termination.

The initial balance of a member's capital account is the value of her initial contributions. Additional capital contributions from a member increase that member's capital account, while distributions taken by the owner decrease the member's capital account. The account is also increased or decreased to reflect the member's proportionate share of the net income or loss of the LLC. Operating agreements can alter the rules for capital account bookkeeping.

While capital contributions might be a difficult concept to understand right off the bat, knowing a few simple key terms and processes can help you decide how such contributions should be handled in your LLC's operating agreement.

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