When setting up a Pennsylvania limited liability company (LLC), many clients have questions about capital contributions. In this post I will answer some of the most common questions clients have asked about capital contributions.
What is a capital contribution?
A capital contribution can be cash, property, services rendered, or a promissory note or other obligation to contribute cash or property or to perform services that is contributed to a limited liability company. An initial capital contribution is typically made in exchange for membership interests in the LLC.
Do I need to make an initial capital contribution when I set up my LLC?
Yes, it is important to make sure the LLC is appropriately capitalized upon formation.
If so, how much capital is appropriate for an initial capital contribution?
It depends on the business. There is no statutory rule requiring a particular amount of initial capital to contribute; however the amount should be sufficient to operate the business. The initial capital contribution of each of the members should be determined in a discussion with an attorney and accountant, who can offer advice as to the appropriate contribution. There also may be special tax consequences to contribution of services in exchange for a membership interest in the LLC. Further, if real estate, intellectual property or other types of assets other than cash are contributed, it is important to make sure the proper legal steps are taken to accomplish the transfer. This can be accomplished by separate agreement between the parties or, sometimes is written directly into the operating agreement.
One of the primary purposes of forming a limited liability company is to shield the members from personal liability for the actions of the company. If the business is undercapitalized, the members run the risk that a court will find that the limited liability company is not a separate and distinct entity from the members, and the members may be subject to personal liability. This concept is commonly known as “piercing the corporate veil”.
Do I need to have initial capital contributions in writing in my LLC’s operating agreement?
Yes, we recommend that initial capital contributions be clearly defined in the operating agreement. This can either be done in the body of the agreement, or attached as a schedule. The Pennsylvania Limited Liability Law of 1994 requires that any promise by a member to contribute to a company must be in writing and signed by the member or the promise is unenforceable.
As you can tell from the above questions and answers, decisions regarding capital contributions in a limited liability company can be complex and the potential consequences can be costly. Therefore, we recommend consulting with an experienced attorney that will take the time to understand your business and advise you accordingly with respect to capital contributions and other questions and issues that arise during the formation of your business entity.
Be sure to subscribe to this blog by email, which can be found on the sidebar, or check back regularly for additional posts about business law and a variety of other legal topics.