How Much Capital Should I Contribute To My New Business?

In this video, I discuss why you need to invest capital in your company, ways for you to do so, the implications in investing with potential partners partners, the different forms of capital contributions, and how much your initial investment should be.

• First, before we discuss these topics, it’s important to note the importance of operating agreements with respect to capital contributions. An operating agreement (also called a shareholer agreement or partenrship agreement) organizes how much interest you, your partners, or investors, have in your company, how much each party will contribute to the company, and what each partner’s role will be in management. The capital that is put into the company ensures that it can begin to operate.
• Along with contributions, you can raise capital for your company by getting a loan or making sales on a product or service. You can also receive a gift acting as a contribution to your company, but getting capital this way is largely unheard of, as the donor would not receive any tax deductions in gifting capital to your for-profit company.
• The best and likeliest way for a company to obtain its inital start-up capital is through members’ contributions, as it is quite difficult to get a loan or make any sales until some time after your operations have begun.
• Putting money into your company actually forms a basis for future tax events. For example, if you were to put $100,000 into your company for its first year of operations, then watch it succeed and grow, you may find that the value of that investment rises to over of the initial $100,000 and a capital gain of $400,000. This is similar to how you buy and sell stocks on the open market.
• Another aspect to remember is that contributing capital along with several partners has its own share of difficulties. Without an operating agreement, Virginia state law states that your share of ownership is proportionate to the amount of capital you invested. Thus, if all parties want equal ownership, they invest the same amount, and if they each want different amounts of ownership, they would invest accordingly. However, an operating agreement can indicate how much ownership each person has regardless of the amount of capital they have contributed.
• Additionally, each member should have a capital account to keep track of the amount each owner has invested, as well as other pieces of information such as rollover profits, which are profits that haven’t been taken out of the company.
• There are three forms of capital contributions: cash, property (such as a product the owner has produced, or a vehicle or office owned by a member that is provided for operations), and services (where a member offers their services to the company without charge, and the value of those services making up their share in the company).
• Our recommendation is to initially invest, when contributing cash, around three to four months in operating expenses to your company, particularly when it has a minimal amount of draw.
• If the company runs out of money, your operating agreement should dictate the planned response, whether with rules regarding how much each member can or is obligated to invest, or a predetermined cap on how much each member is allowed to invest, and many other options.
• You and your partners can also lend money to the company rather than continue to contribute capital. In this case, the profits from the company are used to pay back these loans from its members. Payback of the loans take priority over distributions from profits, especially if the company is being dissolved. However, unlike contributions, loans do not affect the amount of interest one has in the company. The company is required to pay you back, not provide you with a percent of ownership.

Entrepreneurs are going to save the world, and Argent Place Law wants to help. That’s why we are a team of entrepreneur-lawyers serving Entrepreneurs just like you. Think how great it will be to have a legal team with entrepreneurial experience on your speed dial so you can call us up and say, “I need a partnership agreement that spells out a plan for how my partners and I are going to fund the company until it gets profitable.” Call Argent Place Law to find out.