California LLC Capital Contributions
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California LLC capital contributions are what the members of your limited liability company offer in exchange for an ownership percentage of the company. LLC capital contributions can be monetary, or they can be other tangible assets (property, real estate, etc.). Intellectual property and services are also considered capital contributions.
At the formation of your California LLC, you will need to meet with your members to determine the initial contributions, the value of the contributions, and the ownership percentage members will receive in return.
What Can Be a Capital Contribution?
In most cases, LLC capital contributions are monetary. A member invests so much money into the LLC, and in return receives an ownership percentage. Other monetary investments may be stocks, bonds or other such investments which can be easily liquidated for cash.
Property is the second most common capital contribution. This could be real estate, vehicles, office space, furniture, office supplies, etc. It can be difficult to determine the value of such property in relation to a member’s ownership percentage, since property depreciates.
Skills, services and intellectual property are the least common form of capital contribution, and also the most difficult to asses in terms of value. What value should be given to a member who contributes their “tax advice” or “leadership skill”?
Where Are Capital Contributions Listed?
The initial capital contributions are listed in your California LLC Operating Agreement. At the outset of your LLC, each member is then given a member capital account, which can be tracked by your accountant. Further contributions, as well as a member’s share of the profits, are added to their capital account, while deductions, distributions and loans from the company are subtracted.
Valuing Capital Contributions
Generally, a member’s capital contributions are given a value, and then the member’s ownership percentage is in relation to that value.
For example, let’s say Joe and Jane start a California LLC. Joe contributes $10,000, and Jane contributes $40,000. In this case, because Jane has contributed far more, her ownership percentage should be larger. Joe should receive 20 percent of the ownership stake, and Jane should receive 80 percent (note that ownership percentage is not the same thing as the share of votes one has in management decisions; though these can be the same, they do not have to be).
If property is given as a capital contribution, it is important to consider that property can depreciate and appreciate in value. Accounting from year to year should take into account these fluctuations.