There are initial and additional capital contributions. LLC owners can usually secure initial capital contributions in the following ways:
- Equity investment: When a person or business invests money into your LLC in the form of equity, they will usually receive a stake in your business in return. It is often a preferred type of initial capital investment because LLC owners will not be required to pay back the money whether their business succeeds or not. At the same time, the addition of a qualified investor may also add a knowledgeable partner to the business.
- Debt investment: Debt investments are essentially loans. Investors and business owners will usually agree on an interest rate and time frame during which they will be required to pay back any investments made.
- Convertible debt investment: Convertible debt investments are a combination of equity and debt investments. LLC owners can accept a loan investment that can later be converted to an equity stake in the company.
Failure to make an initial capital contribution could result in a penalty or forfeiture of a shareholder’s stake in the LLC. However, whether the shareholder loses their share in a business or not will depend on the stipulations set out in the original agreement. There’s usually also a grace period during which shareholders can make contributions.
If the defaulting shareholder has previously taken over their share of the business from someone else, then the legal predecessor is liable for the outstanding amount. However, they may purchase the share in the business against the amount owed.