September 17, 2016

How Do You Record Capital Contributions In An LLC?

Would it be sufficient to write “capital contribution” or “start up” on the memo line of your check from your personal account in terms of documentation or should you draw up a contract in terms of start cost and ongoing company expenses until you make a profit?

Answer

If this is a single member LLC, then you can probably get away with simply writing “capital contribution” on the check for startup money.

If you are a member of multi-member LLC, you need to have an operating agreement and make sure that it addresses what happens to your capital contribution to protect your rights vs. the rights of the other members in the LLC to a return of the capital contribution.

For example, say you make a $10,000 capital contribution to the LLC and you have 3 fellow members. You are all equal 25% owners.

Suppose the LLC makes a $20,000 profit in year 1.

How is that allocated?

Does each member get $5,000?

Do you get your $10,000 back first, and the remaining $10,000 is divided 4 ways? (eg. you get $12,500 and the other three each get $2,500).

Some other method?

In other words, while the memo line method would establish that the check to the company was a capital contribution (compared to, for example, payment for services or a loan to the company), it would not spell out the members’ rights to the capital contribution after the company earns profits and, one day, eventually dissolves.

How your capital contribution is treated is determined by your operating agreement.

If you don’t have a written operating agreement, and there are multiple members in your LLC….get one.

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