How to Capitalize an LLC

By Rachel Moran

Owners of an LLC, or limited liability company, each contribute various resources to the business in exchange for a portion of ownership. Capitalization is the contribution of cash resources. The process usually begins before official business formation according to the state's requirements, but the contributions are actually made after the business is formed.

Planning

Capitalization requires having a financial outlook. Create an operational budget and break-even analyses for full operations and for each ownership interest. Break-even analyses are reports that show fixed and variable costs — that is, costs that are always the same and costs that change as the business changes — in order to define when each owner and the business as a whole "breaks even" or makes back what it contributed. Once you understand how much money your business needs to run and for owners to make a profit, you can figure out how much capital you need.

Personal Assets

Owners can contribute personal assets to the business. One choice is to contribute cash equally for equal ownership or to contribute cash in different proportions for differing ownership interests. Ownership interests don't have to match capital contributions if all owners agree on the divisions. If the business fails, personal cash contributions may mean neither the business nor the owners incur any debt.

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Debt Financing

Debt financing includes bank loans, small business association loans, credit cards or other lines of credit to provide the business with what it needs to operate. Debt financing can be broken down among the owners equally, although if the LLC is in a state where debt is owned by the entity as a whole, it may be wiser to have the entity or owners with better credit take loans, in order to secure better interest rates. In cases where owners have vastly differing credit scores, the business may decide to combine debt and equity financing.

Equity Financing

Equity financing is the exchange of capital contribution for a share of the company's profits. You may be able to get equity financing from a venture-capital firm or a personal investor. These financiers may affect the company's structure, though, if their investment grants them management rights. If one owner relies on equity financing, he may assign all or part of his management rights to the equity investor without affecting the management rights of other owners who contributed personal assets or other capital.

New Owners

New owners may contribute cash to capitalize their entry into the company. This contribution would change the ownership percentages of the company, but increase the overall value of the company. If a new owner doesn't have cash to contribute, she may contribute skills on a vesting schedule that transfers ownership over a certain time period. If the new owner fails to satisfy vesting agreements or leaves the company before the time period ends, any vested interest is returned to the company.

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Can a Startup LLC Assume Sole Propiertor Debts & Assets?

References

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How Are Profits Split in an LLC?

One of the significant benefits of organizing a company as a limited liability company, called an LLC, is the ability to allocate profits according to the needs of the owners, rather than by the number of shares of stock a person holds. LLC owners, known as members, can choose to split up profits any way that works for them, as long as they elect to be taxed as a partnership.

Can You Lend Money to Your Own LLC Business?

If you have created a limited liability company, or LLC, the law protects you from personal liability for the company's debts. When the company runs into financial difficulties, however, you are free to lend your own money to it, in hopes of generating new business or to meet the obligations of the business. In some cases, this is preferable to borrowing from a bank or another source, thus creating more creditors and cash-flow issues.

PMSI & Bankruptcy

Financing property allows you to immediately enjoy the benefits of an asset in exchange for a promise to pay back the debt plus interest over time. However, the person or company extending the credit may insist on having certain protections in place in the event that you fail to pay, or file for bankruptcy. One type of protection commonly used in these instances is a purchase money security interest.

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