Definition of a Capital Account for New York Businesses and Others Organized as an LLC
All LLC’s in any industry (technology, manufacturing, retail, entertainment, etc.) have ongoing capital needs. Typically, this concept is addressed by the LLC Operating Agreement in its “Capital Account” provisions.
And nearly all limited liability companies’ operating agreements call for the establishment and maintenance of a capital account for each member. These “accounts” are actually not a separate account one opens in a bank, but rather a ledger book that tracks transactions involving capital from members.
These transactions are usually the contributions of capital by a member to the LLC, such as the””initial and additional contributions” over time. There are various accounting methods that track a variety of events, including the operational income or loss of the LLC, which may result in adjustments to the capital accounts. Ultimately, upon dissolution of an LLC, the monies tracked within a capital account is to be distributed back to the member. Again, the LLC operating agreement will dictate the point at which such distribution is to occur, usually after offering priority to third party creditors and other interests to whom monies from the dissolved LLC shall be distributed.
Kinds of Contributions to a Capital Account
Capital contributions typically take the form of cash, but can track the value of other items such as real property, or assumption of debt. Again, the operating agreement will weigh in on this, as well as the consensus of the members as to the valuation of non-cash items. While services may also be considered as capital contributions, the value of such services may have adverse tax consequences to the contributing party and an accountant should be consulted in that case.
Amount of Initial Contributions
Initial Capital contributions are really just a function of what is needed to start up the company. Sometimes that can be millions of dollars and on many other occasions it can be zero dollars. The capital account’s function is to not only track the initial contributions but the ongoing ones as well.
However, as a related point, LLC members should always be concerned about the overall capitalization of the company, if only for liability purposes. As described in this article, inadequate capitalization may be used against an LLC in a lawsuit as an argument to disregard its limited liability protection, a doctrine known as piercing the veil.
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