LLC Capital Contributions and Capital Accounts

In the eyes of the law, an LLC is a separate entity from you and your fellow co-owners (called members). Besides being legally separate from you, the LLC should also be financially separate. That is, the LLC should have its own business bank account separate from your own personal bank account.

But, how will the LLC get funds in its bank account to start doing business, before the LLC makes any money from customers? What if the LLC later needs more money than what it earns from customers in order to expand operations? One way is for the LLC's members to make capital contributions. Capital contributions are infusions of money or other assets that the LLC's members provide to the LLC.

For example, let's say you need $10,000 to get your small business up and running. You have structured your small business as an LLC with two members: you and your friend Larry. You contribute $8,000 in capital, and Larry contributes $2,000 in capital. Now, the LLC has $10,000 in its business bank account and is ready to serve customers.

Naturally, you might want a larger share of the LLC's profits because you contributed $8,000 in initial capital and Larry only contributed $2,000. This is where the concept of a capital account comes in. A capital account keeps track of each member's capital contributions over time so that you can see each member's ownership share in the LLC. Note that a capital account is not an actual bank account; it's merely a process for keeping track of members' capital contributions, and it can be as simple as a spreadsheet.

Thus far, you and Larry have each made only one capital contribution, so the capital account should show $8,000 in initial capital contributions (80% ownership share) for you and $2,000 in initial capital contributions (20% ownership share) for Larry, out of $10,000 in total capital for the LLC.

Say that a month later, Larry makes another capital contribution of $10,000 and you do not contribute any more capital. Now, the capital account should show $8,000 in cumulative capital contributions (40% ownership share) for you and $12,000 in cumulative capital contributions (60% ownership share) for Larry, out of $20,000 in total capital for the LLC.

Thickstun Luo LLC can help you start a small business LLC in Illinois or Indiana and provide other legal advice. Contact us today for a consultation.

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