A capital contribution refers to the cash or property that owners provide to their business. The shareholders may use this money to buy shares in the company or reinvest it in the company. To determine the value of a service contribution to an LLC, research fair market values for similar services. Document service contributions in the LLC operating agreement.
Initial Contributions and Operating Agreements
Initial capital contributions on forming the LLC can be any amount, but should cover startup expenses and assets. An LLC should detail each member’s initial contribution in a written operating agreement. Define contribution requirements and consequences for failure to meet them in the operating agreement.
Impact of Contributions on Ownership
Capital contributions establish ownership percentage and affect voting rights and profit distribution. Distributions allocate profits and losses to members based on ownership interests. New LLCs lack history, so valuing initial interests is challenging.
How Much Should Initial LLC Contribution Be?
How much should the initial contribution be? Only you can determine the amount needed for expenses until sales generate income. Track expenses during startup that the company needs to take responsibility for to deduct from future income. Submit an expense report with receipts where possible.
No specific amount is required; the initial contribution should cover startup operating expenses. Your share of losses is allowed only if you have an interest through your contribution.
Capital Distributions and Withdrawals
You can take as much as you want from the LLC as a capital distribution, as long as it doesn’t violate the operating agreement terms. Enlist legal help to ensure accuracy.
As an LLC grows and evolves, it can make changes to how its profits are allocated. It is also vital to lay out the procedure involved when a member wishes to exit the LLC.
Exit Strategies for LLC Members
There are three methods of withdrawing from an LLC that should be addressed in your operating agreement.