How to Capitalize an LLC

Capitalize a business through owners' investment, equity financing and debt.
Capitalize a business through owners' investment, equity financing and debt. (Image: Thomas Northcut/Photodisc/Getty Images)

After business owners register a new limited liability company (LLC) with the state, they must each capitalize their interest in the company. Each owner contributes resources, such as cash, property or services, to the company in exchange for a proportionate ownership interest. The amount invested by owners may or may not meet the capital needs of the company until there is enough income to cover operations. Further capitalization can consist of a combination of equity or debt financing.

Establish owners equity contributions to the company. Decide how much each owner must contribute in exchange for his ownership interest. This amount can be nominal, such as two owners contributing $100 for fifty percent ownership interest each, or it can represent a division of the actual amount needed to run the company until it starts to make money. The owner's investment can come from savings, personal loans taken out in his name, credit cards or any other source. Once the resource is contributed to the company, it becomes part of the owner's equity, despite the fact that the owner might have to pay the money back to a source through personal assets.

Obtain debt financing to cover any amount needed to capitalize the company in excess of the investment by owners. Apply for business loans, lines of credit, credit cards in the name of the business or any other type of institutional financing that must be repaid according to terms and with interest. Owners can also lend money to the company that is separate from their equity investment. The money would be repaid with interest, as with any creditor.

Secure equity financing. Equity financing capitalizes the company with money from outside investors who contribute resources in exchange for an ownership stake in the company. This category includes venture capitalists, angel investors and friends and family who may invest in the company in exchange for a minority position. Unlike debt financing, this type of capitalization can affect how the company operates. New owners, even if they only hold minority positions, can have a say in the overall management and direction of the company, depending upon how their ownership interest is structured.

Account for capitalization in the company books. Each capitalization source must be correctly recorded. Establish an equity account for each owner and list investments and withdrawals. Create an account for each source of debt so payments and interest can be tracked.

Tips & Warnings

  • An LLC is not required to use equity financing or debt to capitalize the company. Some LLCs operate and are under-capitalized. An LLC can also stipulate in its operating agreement that all capitalization needs must be met by a proportionate investment by owners. The LLC,s managing member can put out a mandatory call to owners to make additional capital contributions. If an owner fails to meet the call, his ownership percentage would be in jeopardy.

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