Georgetown Trust Blog

The Capital Contribution Question

Posted by Georgetown Trust on Feb 1, 2017 11:18:17 AM

StackofDollars.jpe

The creating of a company, be it a corporation or a limited liability company, requires one to specify to the service provider certain particulars with regard to the entity. You will be required to select a company name, identify the owners and their percentage ownership, specify the type of business to be performed, the geographic location in which the entity will operate and who is responsible for managing the company. These are all very straight forward, however, the item that causes the most confusions is the capital contribution amount.

What is Capital Contribution? 

In simple terms, the capital contribution is the money, services, or property that one will contribute to the company in exchange for ownership. This contribution does not have to be contributed to the company upon creation. The contribution can be the for future monies, services, or property. 

What should you specify?

The first thing to remember is there is a difference between specified capital and paid up capital. The service provider is typically looking for an amount specified capital so that the value of a share can be easily determined. As an example, you request a company to have 100,000 shares with a specified capital amount of $100,000 and you have a share price of $1.00. This does not mean that you have to pay up the capital of $100,000 but that you expect over time to put this amount of capital into the company.

The paid up capital is the actual amount of money, goods or services that you contribute to the company at inception or over time. This is the true value of the company and represents the true value of the company.

Typically the capitalization of a SDIRA/LLC (Limited Liability Company) the amount of dollars you will be moving from the SDIRA custodial account into the LLCs bank account. For regular LLCs or International Business Companies (IBCs) it is the amount that you expect to contribute to the company over time.

Can you add more capital?

Certainly. You can always add more capital to a corporate entity regardless of whether or not the funds will be used in operations or investments. Remember, you are simply putting more money that you have already paid taxes on into your investment.

Be Careful....

If you don't actually capitalize the company then you run the risk of a judge saying that, in fact, you don't have a company. That you are a company in name only and that you as the individual, or you and your partners, are personally liable for the actions of the company. In essence, once you have capitalized the company you have established its existence and have created the asset protection structure you had intended.

In Summary

When setting up an international entity and come across the request to specify the capital contribution remember there is a difference between specified and paid up capital. Do not panic thinking you have to contribute that amount of money to the company immediately. However, make sure that you do capitalize the company with goods, services or cash so that it is recognized as a corporate entity in the court of law.

Take Control of Your Investments with a Self-Directed IRA

Topics: Self-directed IRA, Asset Protection, International Business Companies