An LLC, or limited liability company, is a business vehicle structured as a hybrid between a partnership and a corporation. State LLC laws are designed to meet the needs of small businesses by allowing LLCs to operate with considerably more flexibility than a corporation. LLCs obtain the money they need to operate through capital contributions.
Compared to a corporation, an LLC enjoys reduced legal formalities and a more flexible management structure. You can form an LLC by filing Articles of Organization with your state government and paying a filing fee. Once the LLC is formed, it is treated as a legally independent business entity; its owners, known as members, enjoy limited liability. The ownership percentage of each member is determined by the amount of capital he contributes, unless the LLC has adopted an operating agreement that states otherwise.
A member makes a capital contribution to the LLC when he transfers money, property or services. The capital contribution then becomes the property of the LLC. A member who adds capital to an LLC buys an ownership stake, which normally entitles him to a proportionate share of LLC profits and voting rights. Members make capital contributions when the LLC is first formed and at any time during the LLC’s lifetime, as long as all members agree.
Member Capital Accounts
Individual capital accounts are created to receive contributions to the LLC from each member. The capital account reflects how much money the member would receive if the LLC dissolved, liquidated its assets, paid its debts and distributed remaining proceeds to each member in proportion to his ownership percentages. The balance in each member’s capital account initially equals the value of his first capital contribution. This balance can be adjusted up or down even with no further capital contributions if the LLC takes on debt, its property appreciates or depreciates, or its cash earns interest.
Making a capital contribution to an LLC is usually a fairly simple matter. The member transfers money or property to the LLC by transferring money into the LLC’s bank account, for example, or by transferring title to property to the LLC. The contribution is recorded by crediting the member’s capital account by the amount of the contribution. The member’s cash account -- the account created to allow the member to receive distributions of profit from the LLC -- is then debited by the same amount. Contributions of property must be appropriately valued before adjusting accounts to help avoid occasional complications.
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