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How to fund your LLC right the first time
“Initial Capital Contribution” is an accountant’s long way of saying “seed money”. In other words, the first deposit you make into your LLC’s business bank account. You might run across a few other terms for this step, like “Initial Contribution” or “Capital Stock”, but they all refer to the same thing.
What's it for?
Beyond its potential use for business expenses (office rent, equipment, marketing…), this deposit serves a more important purpose: to demonstrate that you have become the official owner of your business through a purchase of its shares. This demonstrates that you are no longer running a sole proprietorship and officially separates your LLC from your personal assets.
How do you make this first investment in your business-of-one?
Once your LLC if fully set up, you’ll need to have a few things in order:
- Open a business bank account using your EIN/FEIN (Federal Employer Identification Number) and listing your LLC as the account holder
- Match the amount of your initial contribution to the amount listed in your LLC Operating Agreement
- Make your contribution using funds from your personal bank account
Why from your personal account?
Well, remember that one of the reasons for getting an LLC in the first place is to protect your personal assets from any business-related claims or debts. Turns out, making an Initial Capital Contribution is a great way to demonstrate that your LLC is a real business, separate from your personal finances.
While it’s expected that future deposits into your business account will come primarily from customer payments for services rendered, be sure this first deposit comes from your personal money. You, as the single shareholder in your business-of-one LLC, are making the first financial investment in its formation, maintenance and success. (Note: Keep a record of this initial deposit, and any future personal funds you contribute to the business, in case you ever need to protect yourself from personal liability down the road.)
Wanna know more?
Dive into this quick FAQ for all things related to Initial Capital Contributions. If you’re doing this on your own, there are several ways to handle your Capital Contribution. With Lettuce, we have focused on a simple, trackable way to manage this step and ensure your LLC is correctly set up to protect you and your business. Read through our FAQs to learn more.
How much do I need to contribute?
Depends. Every business is different, but here’s a good rule of thumb: Estimate how much you plan to spend getting your business up and running for the first few months, and contribute that amount. Could be as low as $1,000. It all depends on the needs of your business.
Is my contribution a taxable event?
Probably not. Cash contributions aren’t generally taxable (and can’t be used as write-offs, in case you were wondering). However, if you’re planning to contribute property, and are setting up your LLC outside of Lettuce, you should consult with a tax attorney to understand any tax implications.
Can I change or withdraw my contribution?
No. But there are ways to get your money out of your LLC without selling it or dissolving it. As the owner, you’re entitled to pay yourself. These payments are called distributions and are funded by your profits. Over time, should your profits outstrip your investments, you’d be able to pay yourself more than your initial contribution.
How does my capital contribution work with Lettuce?
Lettuce requires that you fund your LLC with an initial $1,000 payment from your personal account. This is a simple, easily trackable way to ensure that your LLC has been established and funded as a legal entity that is separate from your personal finances. Once you have made that deposit, it is available for you to spend on whatever your business needs.
Ready to get that LLC up and running?
Or better yet, are you ready to start optimizing your accounting practices and saving big on your business taxes? With Lettuce in the mix, your business finances will be taken care of, so you can keep your eye on the prize: making your business the best it can be.
Curious if an S Corp is right for you?
Try the Lettuce Tax Calculator to see how much more you can take home each year.
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