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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References

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