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contributing capital?

by rob reid
(Ewing NJ USA)

I have an LLC, we are starting to run low on funds as our LLC was established for our ghost hunting club. This was so we could legally accept funds for tours and the like. But our funds are just about depleted and we still have expenses related to web site and the like. As well as the tax preparation in January that will empty the rest of our funds.

Is there a law against us contributing our own personal funds into the LLC, we are a partnership LLC? So this is what we must do to keep things going. So, do we just fill out more membership shares related to the contribution? Or can we just deposit the funds right into the LLC?? Please help as we don't want to go about this in the wrong way as we just formed our LLC. Thank you.

Rob

Answer

There is no problem with contributing additional funds to your LLC. Simply deposit the money into the LLC's bank account.

You can contribute the money either as a loan to the LLC, repayable to the member who contributed the funds, or as a capital contribution.

You do not have to issue additional membership interests for the capital contribution, nor transfer membership interests/units between members.

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Nov 18, 2008
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by: rob

Ok, I can deposit the funds directly. But how do we differentiate that from profits, or shall I say how do we show to the IRS that is not a profit as we have no profits just contributions?

Answer

If you classify the deposit as a loan, then draw up a promissory note between the member and the LLC (Legalzoom sells one for $14.95, use the search box at the upper right and search for "promissory note").

If it is a capital contribution, make a written record of that as well.

Loans and capital contributions are not "income" or "revenue" for your LLC for tax reporting purposes, so you would not report those amounts on your tax returns.

Your LLC is taxed on its income, not on its cash flow--so while a loan does increase your cash flow (the LLC has cash where it did not before), it is not considered income.

Think of it this way, when you borrow $200,000 to buy a house, you don't report $200,000 in additional income on your tax return--because it's a loan, not income.

The flip side to this is that when the LLC pays back the loan, it is not a deductible expense (though interest on the loan is deductible).

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