Funding Your LLC: Avoiding Mistakes
I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.
Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan?
A: It is important to distinguish your capital contribution (in exchange for which you receive your membership interest) from loans (which are to be repaid).
The LLC Operating Agreement should have an exhibit that states the amount of your capital contribution. You should make a deposit of that amount into the LLC’s bank account. If your LLC has membership certificates, you (as a member) are entitled to have one made out in your name, showing your membership interest (100%, or all of the Units), and signed by you as the Manager (which role should be specified in the Operating Agreement).
Each loan should be documented by a loan agreement and promissory note. To avoid “imputed interest” problems, the interest rate in each case should be at least as great as the relevant Applicable Federal Rate.
It is important that the LLC be sufficiently capitalized, that separate LLC bank account and accounting books be maintained, and that the loans be documented appropriately to avoid “alter ego” problems – please see Beware Your Alter Ego (discusses corporations, but applies similarly to LLCs).
Check out all posts about LLCs.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.