How can I Invest More Money in My Corporation?
This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
When you contribute additional funds to the corporation, you probably either:
- Will be issued more shares (though, in my experience, this is less likely because founders often issue all of their shares up-front) through a process like that described above, or
- Will make a loan of the additional amount to the corporation, in which case you should prepare an appropriate loan agreement and promissory note (if you expect to make additional contributions in the future, it probably makes sense to enter into a revolving loan agreement with a schedule of contributions and repayments that is updated from time to time).
Photo credit: Arjun Kartha via stock.xchng
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.
Business Entities, Financing, Startup
10/12/2011 | 6:00 am Permalink
It’s also possible for a shareholder to make a “capital contribution” to the corporation without receiving additional stock or any sort of debt. The contribution is not taxed to the corporation and has the effect of increasing the shareholder’s basis in the corporation’s stock.
For a corporation owned by a single stockholder, the economic effect is making a capital contribution is the same as purchasing new stock. But, for a corporation owned by multiple stockholders, that’s only true if each stockholder gives in proportion to its holdings.
Why would you want to do this? The process is generally easier — the board passes a resolution accepting the capital contribution, and each contributor signs a short agreement saying that it is indeed a contribution, not a loan. No additional stock certificates are printed and the corporation’s charter isn’t amended.
Of course, it’s not appropriate in all cases — the tax situation can get tricky when the corporation has multiple classes of stock or when stockholders give out of proportion to their holdings. In those cases, the cost of figuring out the tax situation usually eclipses the benefit of the simpler process.