Capital contribution
Cash, property, or services contributed by a member to the LLC in exchange for membership interest.
Definition
Capital contribution is what a member contributes to the LLC. Cash contributions are the most common; contributions of property (real estate, equipment, intellectual property) are also permitted under 6 Del. C. § 18-501. Service contributions ('sweat equity') are permitted but have specific federal tax implications. The Operating Agreement records each member's capital contributions and the resulting capital accounts.
Context
Capital contributions establish each member's initial economic stake and tax basis. Future contributions increase capital account; distributions reduce it.
Example
Two founders form a Delaware LLC. Founder A contributes $50,000 cash; Founder B contributes a website worth $50,000. Both have $50,000 capital accounts and 50% membership interests.
Common pitfalls
- Service contributions are taxable to the contributing member as compensation in some structures.
- Property contributions may trigger gain recognition for the contributor.