Small business question
A friend of mine and I recently bought a small business. It’s an LLC. His capital contribution was 40k consisting of a personal line of credit and sale of assets. I contributed cash totaling 10k.
My question is …Is the un used portion of the line of credit considered a capital contribution as we develop an Operating agreement? His line of credit totals 30k and he has drawn down approx 13k to date.
It seems that the capital contribution we recognize should only include the cash and perhaps the spend amount on the line of credit, not the remaining un used portion on the line.
Your help/thoughts would be appreciated. Thank you
I’m happy to answer for Jeff. Generally a capital contribution can only be in the form of capital, which is in the form of money or property, to a business by an owner, partner, or shareholder. Each of you may have a capital account, which can keep track of the capital you each contributed. Cash available in a line of credit is not capital. Most importantly, your partnership agreement will specify what is considered a capital contribution. For more details, look at our article on Putting Personal Money Into a Business.
I hope that helps!