Is a capital contribution something you can only do when the LLC is first formed, to fund it, or are you allowed to do more contributions in the future if the LLC needs more funding? Or are you supposed to do loans (from your personal name to the LLC) for any subsequent funding after the LLC was formed? This is a single member LLC, if it matters for the purpose of the question. Thanks.
You can make a capital contribution at any time.
[ I know that you have a SMLLC, this next part is just for illustration to the readers, because I get this question a lot]
To decide if a loan or capital contrib is preferred, we need to know how the LLC is being taxed, and if there are other members involved.
There are exactly 4 ways for an owner to get cash out of an entity:
- taxable dividends (C-corp) or distribution (S-corp) or guaranteed payment (partnership) or draw (disregarded SMLLC aka sole proprietor)
- loan repayment/expense reimbursement
- borrow money from the entity
#2 has possible tax consequences, and could possibly even bust your
S-election (this is bad),so get advice
#4 strongly implies that you will repay the money at a future date. IRS doesn’t like “open ended” loans from the company.
In your case, as a SMLLC, you are probably taxing the LLC as a disregarded entity. You can take cash out of the LLC as either a loan payment or a distribution (sometimes called a draw) without worrying about the consequences. Just depends on how you want to view it.
A bank will prefer to see equity rather than debt.
OK thanks Mark. It’s a single member LLC with the default election of “disregarded entity”.
I didn’t realize “draw” and “distribution” meant the same thing.
In terms of putting more money into the LLC, does it matter if you make a contribution or a loan? The NOLO book I own says you need to make it a loan in order to preserve the corporate veil, but I don’t understand why this is the case.
Doesn’t matter. Capital contributions do not harm the corporate veil. Microsoft sells stock (equity) all the time.