Tuesday, July 15, 2008

Initial LLC Member Contributions

Many an LLC operating agreement merely lists dollar values that members are to make as an initial capital contribution. But what happens if one member never makes the agreed contribution? Planning is required to put the aggrieved members in a solid position should this situation come to pass. Here are a few basic drafting points for inclusion in an operating agreement that can tighten up this area:
  • Delineate initial capital contributions between cash and non-cash contributions;
  • For contributions of property other than cash, make a specific list of the items to be contributed (i.e., HP copier, Dell desktop computer, conference table, etc.);
  • State a specific deadline by which initial capital contributions are to be made;
  • Provide for interest to accrue on any unpaid balance of the initial capital contribution (perhaps also provide for a penalty when a delinquency occurs);
  • Provide for attorneys fees to the party collecting upon a member's failure to make the required capital contribution.
Here is sample language of the foregoing:

Section 7 Capital Contributions.
  1. Each Member shall contribute or shall have contributed, as an initial capital contribution ("Initial Capital Contribution") to the LLC the amounts set forth below. Any non-cash contributions to be made by the Members and their valuations are set forth in Attachment 1 hereto. Below are the cash contributions.

    Member NameInitial Capital Contribution
    Stan Jordan$ 30,000
    Bob Lobe$ 30,000
    Tom Stroud$ 20,000

  2. The Members shall complete their initial capital contributions to the LLC within 10 days of the date of this agreement unless another date is agreed upon in writing by all LLC Members.
  3. Interest shall accrue against a member upon any unpaid capital contribution at a rate of 6% per annum, compounded annually, commencing from the due date of the initial capital contribution.
  4. Indemnification of Attorneys Fees and out-of-pocket costs. Should a member breach Section 5.3 of this agreement, any other member may sue for enforcement and shall be indemnified by the breaching member for its reasonable attorneys fees and out-of-pocket costs which in any way relate to, or were precipitated by, the breach of Section 5.3 of this agreement.

Language for attorneys fees can be much more detailed than the above sample but it should give you an idea of the minimum specificity one desires in operating agreement on the topic of initial member contributions.

5 comments:

Anonymous said...

Are initial capital contributions required? Are there legal or tax implications if the members decide not to make initial contributions?

The LLC in question will be a small retail establishment with two members (member-managed). These individuals do not have a lot of cash on hand and plan to fund their start up costs with a loan.

jjray said...

Are initial capital contributions required? No.

Tax implications of failing to make capital contributions? With an S corporation, owners only receive basis for capital contributions and allocations of S corporation income. One can only deduct losses to the extent of basis. In the case of LLCs, this potential problem is avoided. The members receive basis for their allocable portion of LLC debt.
http://llcoperatingagreement.blogspot.com/2008/05/tax-advantages-of-llcs.html

Somer said...

Unfortunately, I had no idea what I was doing when I set up our LLC. Again a small LLC, two members, member-managed. The initial contributions are lower than anticipated and the percentages between the two of us are wrong as well. Should I redo the whole agreement?

Thanks.

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