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LegalGPS : Nov. 29, 2023
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.’
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.
LLC contributions come in different forms:
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.
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.
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.
Your operating agreement should clearly outline:
Setting contributions requirements: Define the nature and value of each member's initial contribution and any future contribution requirements.
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.
Failing to define contribution value: Always determine and document the value of non-cash contributions.
Ignoring future contributions: Your business may require additional contributions down the line. Make provisions for this in your agreement.
Skipping dispute resolutions: Outline what happens in the event of disputes over contributions.
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 |
Remember, this is just a concise example for an LLC contribution clause and your operating agreement should be much more comprehensive.
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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