Capitalize LLC: Everything You Need to Know
When you need to capitalize LLC, your business may be in need of additional capital for inventory, expansion, advertising, or other reasons.3 min read
How to Capitalize an LLC
The owners of a limited liability company (LLC) will contribute all types of resources to the company. These resources are given in exchange for ownership in the business. When an LLC owner contributes cash, this process is referred to as capitalization. Before the business is officially formed, the process of capitalizing an LLC will begin, although the timeline depends on state laws and regulations. However, the contributions usually won't come through to the business until after the formation process is complete.
Before you can capitalize an LLC, you must have a plan and a strong financial outlook. Each ownership interest should have a break-even analysis and an operational budget. A break-even analysis is a report that includes variable and fixed costs, or the business expenses that can change as the needs of the company change, along with the expenses that always remain the same. This document must be accurate to show when each owner will break even and what they could earn in returns, based on the performance of the business.
After you have outlined the financials and understand how much is needed for the business to operate, as well as how much is needed for the business to be profitable, you'll have a better idea of how much capital is needed.
An LLC owner can give personal assets to the company. One option is to give cash in varying proportions, depending on the ownership interest in the business. Another option is to have all owners contribute an equal amount for an equal share of ownership. Capital contributions don't necessarily have to directly match the ownership interests, as long as owners agree on how the business is divided among them. When owners give cash contributions to a business, the owners and the business may not have to incur debt.
Examples of debt financing include:
- Lines of credit
- Loans from small business associations
- Credit cards
- Loans from banks or other lenders
If the company needs to take out a loan or use credit for business expenses, the debt financing can be split between owners, or it can be owned by the business entity. However, newer businesses or those without much history may have higher rates on loans, so it might make sense for the owners with better credit history to take on the debt financing. If the owners of an LLC have varying credit scores, the business can use both equity and debt financing.
When a business exchanges a share of its profits for a capital contribution, this process is called equity financing. Personal investors and venture capital firms offer equity financing to businesses. Undergoing rounds of equity financing can bring new people into the business, which can impact the structure of the business. However, this would only apply if the terms of the investment grant the venture capitalist or personal investor rights to manage the business. One owner can grant their management rights to an investor without impacting the other owners' management rights.
A new owner of an LLC can contribute capital to enter into the company. Although this change would impact the percentage of the company owned by each owner, the process can also increase the company's value.
New owners can also contribute skills based on a vesting schedule if they are unable to provide cash right away. The schedule will outline how the ownership will transfer to the new owner, based on what they are contributing to the business. If a new owner leaves the business before the terms of the agreement have ended or doesn't satisfy the terms of that agreement, the company would retain all vested interest.
LLC and Members
To form an LLC, you must file articles of organization with the Secretary of State. Every state allows multi-member LLCs to be formed. A multi-member LLC is an LLC with two or more owners. In some states, a business owner can also form a single-member LLC. By forming an LLC, the owner can take advantage of limited personal liability. With limited liability, the owner can only be held responsible for business debts up to the investment amount.
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