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LLC Contributions: How to Address Them in Your Operating Agreement

LLC contributions are essentially what each member brings to the table when starting an LLC. It can be money, property, services, or even a promise to contribute in the future. These contributions determine each member’s ownership percentage, known as ‘membership interest.’

 

 

abstract of people in front of a sales bill

Understanding and clearly defining these contributions in your operating agreement is vital. If not clearly addressed, you may find yourself in difficult situations, such as misunderstanding among members or disputes regarding profit distribution.

Types of LLC Contributions

LLC contributions come in different forms:

  1. Cash Contributions: This is the most common type, where members contribute cash towards the business. This is the most common type, where members contribute cash towards the business.

  2. Property and Equipment: Here, a member contributes physical assets like property or equipment instead of cash. It's important that the operating agreement clearly states the property's value.

  3. Services: In some cases, a member may offer services (like consulting or accounting) in lieu of cash or physical assets. Here, both the nature of the services and their value need to be defined in the operating agreement.

How to Address LLC Contributions in Operating Agreement

Your operating agreement should clearly outline:

  1. Setting contributions requirements: Define the nature and value of each member's initial contribution and any future contribution requirements.

  2. Detailing consequences for failure in contributions: If a member fails to meet their commitment, what happens? This should be clearly mentioned to avoid future disputes.

To do this, make sure you enlist the help of a legal expert to ensure everything is in order and accurately represented.

Common Mistakes to Avoid with LLC Contributions

  1. Failing to define contribution value: Always determine and document the value of non-cash contributions.

  2. Ignoring future contributions: Your business may require additional contributions down the line. Make provisions for this in your agreement.

  3. Skipping dispute resolutions: Outline what happens in the event of disputes over contributions.

 

distraught person

LLC Contribution Example

Let's illustrate this with an example. Say Member A is committing $20,000 cash, while Member B is offering an office equipment worth $15,000:

 

Article III: Capital Contributions

"Member A, as initial contribution to the Company, agrees to make a cash contribution of $20,000, and Member B agrees to contribute office equipment with a fair market value of $15,000. Said contributions shall be made in full on or before __ date."

"The Members acknowledge and agree that their respective Contributions have been assigned the values stated above for all purposes connected with the Company and they shall have no right to demand or receive any additional capital credit or any other form of extra payment for such Contributions."

"Additional contributions, if deemed necessary by x% of members, must be made in a manner agreed upon by said majority. Failure to comply with an agreement to contribute additional funds can result in penalties as outlined in Article __."


Remember, this is just a concise example for an LLC contribution clause and your operating agreement should be much more comprehensive.

Do you need a lawyer for this?

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes (especially if you have multiple owners). But often for single-owner businesses, you don't need a lawyer to start your business.

Many business owners instead use tools like Legal GPS for Business, which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

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