What are Capital Contributions?

Plan for Capital Contributions

Capital contribution transactions are a common transaction for San Jose entrepreneurs. Because these transactions have significant legal consequences, both for the investor and the business, it is important for business founders to consult with an experienced startup attorney. The San Jose corporate attorneys at Startup Company Counsel have extensive experience in assisting entrepreneurs to access funding. They can help your business plan for the future with long-term strategies that promote sustainable business growth.

Capital contributions are funds provided to a business in exchange for an ownership interest in the business. Because capital contributions impact ownership and potentially control of the business it is important for business owners to evaluate carefully in order to prevent the business from being left with either too little capital, or its founders with too little control.

How to Plan for Capital Contributions

Control of a business is not always static and is not always dictated solely by the initial allocation of ownership interests.  Ownership is changed each time a business initiates a round of funding through the creation of additional equity interests. Thus, the initial capital contributions a company takes in must be considered carefully in light of both future rounds of funding and the foreseeable needs of the company. First, a company must ensure that its funding is sustainable. Many funding agreements contain provisions for stock options, repayment, or other terms which will impact the financial health of the business at defined points in the future. Business owners must carefully consider the projected growth of their companies. If reasonable growth projections cannot sustain the proposed financial terms of a funding agreement, then other sources of funding must be considered.

Next, business owners should evaluate their long-term plans for the growth and management of the business. If owners intend or desire to retain control of their business, they should avoid taking in capital contributions that will dilute that control. If, on the other hand, an owner would prefer to let others manage or control the business, and simply maintain an equity interest in a growing company, taking in additional capital contributions may be an effective way to reach this goal. In considering the impact of a capital contribution, owners should also bear in mind the impact of shareholders and other business stakeholders who might be introduced with future rounds of funding.

Finally, tax consequences associated with taking in additional capital contributions should also be carefully considered. Additional capital contributions are often used to purchase business assets, pay wages, and stock inventory. All of these investments carry different tax consequences which may or may not fit into a company’s overall tax strategy. Consult with a tax professional to develop a comprehensive tax strategy for your business. Then, a corporate attorney can help you plan for capital contributions which promote that tax strategy.

Smart Funding Strategies for Smart Business Owners

Let the experienced attorneys at Startup Company Counsel help you build a successful business from the ground up. By developing financing strategies which sustain long-term growth, your business will be primed for success from day one. Schedule a consultation today by calling (855) 353-5377, emailing admin@startupcompanycounsel.com, or submitting a request through our online contact form.

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