A “capital contribution” is a contribution of money (cash) or property (assets) to a business in exchange for an equity ownership interest. Each business owner (a member or partner) have a “capital account” which is a line item on a balance sheet as an equity account (not a separate bank account for each) that details:
A capital account should be kept for all companies, even with a single member ownership structure. Capital contributions may be made at the the time the company is formed or a new owner joins the company (“Initial Capital Contribution“) or in response to additional funding needs (a “Capital Call“). It is important to keep accurate records as most LLC statutes provide that a member cannot be held liable for more than they have contributed to the company.
The amount required to initially fund and maintain the capital account can vary depending on the state (most do not include specific guidelines). Often the amount is based on funds required to pay start-up expenses. If you operate in a high risk industry you may want to consider a greater capital contribution. Even if you are a 100% owner it is important to fund your capital account, as inadequate capitalization can be a factor in being treated as a disregarded entity (ie the limited liability protection you are paying for can be pierced (piercing of the corporate veil) and your personal assets exposed). You should also assess insurance options.
More capital can be contributed and funds and assets can be withdrawn. Timing depends on state statute and governing business documents. Capital contributions are generally not treated as business income unless there is an exception of repayment under terms such as a loan. Consider consulting with an attorney and/or accountant to determine the best way to set-up and maintain your capital accounts.
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