When you form an LLC and become an owner, you put money into the business to get it started. An owner of an LLC is called a "member," and the owner is not an employee.
Your contribution to the LLC as a member is called your capital contribution, your contribution to the ownership. This capital contribution gives you a share in the LLC, and the right to a percentage of the profits (and losses). If you are the only member, you have 100% of the ownership. If the LLC has several owners, each owner's share is determined by agreement, usually a formal operating agreement.
Member contributions may be made in cash or non-cash (property, for example). Property contributions must be listed and described, and the members must agree on the fair market value of non-cash contributions.
Two Types of LLCs - Same Capital Contribution
LLCs with one owner are single-member LLCs. They are taxed like a sole proprietor, reporting business taxes on Schedule C.
LLCs with multiple members are taxed like partnerships.
Your capital contribution works the same way for both types of LLCs.
How Is My LLC Ownership Recorded?
Once you have put money into the LLC, your capital contribution and the contributions of other members are shown in the LLC's balance sheet as an equity (ownership) account. Each member's capital account records the initial contribution and any additional contributions made during the year. It also records distributions (amounts taken out by each LLC owner) during the year and a final capital account total for the year.
How Much Do I Have to Contribute to the LLC?
Initial capital contributions on theformation of the LLC may be any amount. Members usually contribute enough to pay startup expenses and assets.
But what if you don't want to—or can't—make a contribution to get your LLC started? Without this contribution, you could have a tax and legal problem, because you don't have a personal risk in starting the business.Your share of any partnership losses, for example, is allowed only if you have an interest (by your capital contribution) in the business. No interest, no loss.
How Much Can I Take Out of the LLC?
You can take as much as you want from the LLC as a capital distribution, as long as it doesn't violate the terms of the operating agreement. If you are the only member, you can take out what you want, but you must leave enough money in the business for its normal operations.
Note
Each LLC owner pays income tax on their percentage of the net income (profit/loss) for the business for the year, not on what they take out of the business (distributions). For example, if a partnership with two partners has a net income is $150,000 for the year and each partner took out $50,000, the partners are each taxed for $75,000 (their share of the net income), not on the $50,000 they each took out.
Your distributions from the LLC are set every year by your percentage of ownership and the operating agreement. For example, initial member percentages of ownership can be set by the operating agreement, and the agreement can set different percentages of the share of the profits/losses. The members can do anything they want as long as it isn't in conflict with state law, as long as there is an agreement, and the agreement is stated in the operating agreement.
Note
Each state has laws regulating partnership contributions and distributions. Florida partnership law, for example, regulates partnership contributions, sharing of profits and losses, and distributions.
As noted above, member capital accounts are governed by the operating agreement, which has specific requirements for contributions and distributions.
Can I Loan Money to the LLC?
LLC members may also loan money to the LLC, separately from their capital contributions. The terms of a member loan to an LLC, like any other owner loan, should be documented carefully in a business loan agreement specifying the amount, interest rate, repayment terms, and default provisions. A loan by a member does not change the member's capital contribution or distribution of profits and losses. Read more about the difference between investing in a business vs. loaning to a business.
Why a Single-Member LLCs Needs an Operating Agreement
Even if you are the only member in your LLC, it's a good idea to have a one-member operating agreementto describe your ownership, distributions, and profits/losses and to prevent state default operating agreement regulations from overriding your wishes.
This article includes general information; the author is not an attorney or CPA, and no legal or tax advice is being provided. State laws and individual circ*mstances may vary; consult your attorney before you make any decisions or take any actions that could affect your business.
