Contribution Agreement: Everything You Need to Know
A contribution agreement is a legal document that will lay out the conditions surrounding the transfer of an asset from one party to another.3 min read
2. How to Form a Contribution Agreement
3. Understanding an LLC Contribution Agreement
4. Sections of the LLC Contribution Agreement
A contribution agreement is a legal document that will lay out the conditions surrounding the transfer of an asset from one party to another. Small businesses also uses these type of agreements for:
- Funds to cover a retirement account
- A large donation to charity
- A business affiliation
To be legally binding it must:
- Specify all the parties involved in the transaction
- Define the terms and limitations
- Meet all state and federal laws
- Include any penalties that will occur for violations
- Have signatures of all parties involved
What Is an Equity Contribution Agreement?
An equity contribution agreement occurs between two parties that are agreeing to pool together cash, capital, and other assets into a company to conduct business. The capital is provided in exchange for a portion of the equity in the company venture. An equity contribution agreement will need to include:
- The name and address of the company or organization that is being created.
- Information about the in-kind and cash contributors in the agreement.
- The nature and terms of the agreement between the two parties.
How to Form a Contribution Agreement
Forming a contribution agreement requires several steps to ensure that everything is included.
- Consult a legal library, government website, or the Internal Revenue Service to find agreement templates covering the varying types of contribution. Follow the sample by creating the same sections such as title, terms and conditions, and contractual elements.
- List all parties to the agreement. Be sure to include any beneficiaries when applicable and anyone who has an interest that could alter the terms and conditions of the agreement. Use full legal names and complete addresses of all parties, and make sure the owners are clearly identified.
- Specify the details of the items being donated such as whether it is material, money, property, or even computer code. Make sure it is fully described so that anyone reading it could understand what it is.
- Create an outline of the contribution limits or time constraints, such as the period of acceptance before the agreement is voided. All obligations should be completely explained and all time limits and regulations should be agreed upon.
- List and detail the laws that were utilized to create the agreement. This is important in case any of the agreement is challenged later. Include references such as tax regulations or government handbooks.
- File a copy of your agreement with any necessary regulatory agencies. Provide a copy to the IRS, all parties involved in the agreement, your financial officer, and accountant.
Understanding an LLC Contribution Agreement
The members that make up an LLC, whether they are other companies or individuals, will often make a financial contribution to start the business in exchange for a percentage of the equity of the company. The company may decide to sign a contribution agreement if it needs additional funding for things such as:
- Financing an owner buyout
- Funding for capital improvements
- Covering routine expenses
Sections of the LLC Contribution Agreement
A contribution agreement should contain multiple sections including:
- Recitals and definitions - This section will include the name that is receiving the contributions, the reason the agreement is being created, and under which type of legal authority the agreement would be enforced. This section will also define the terms that are to be used in the agreement.
- Contributions - This section will need to describe the type of contribution that is being made, its value, the terms of the contribution, and an agreement transferring ownership of the contribution from one party to another.
- Liabilities - The agreement should also state that the LLC does not assume liabilities related to assets that are being transferred to the company. The person contributing agrees to pay any outstanding debts or additional costs relating to the assets that are being transferred. This will protect the LLC from any liability that may arise from the contribution.
- Representations and warranties - This section reiterates that the contributor is authorized to make the transfer and further defines the warranties and responsibilities that both apply to the contributor and the LLC. This section should also state that the LLC has no outstanding liabilities that could prevent the transfer from occurring.
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