Funding an LLC

Funding an LLC is not hard. A small business owner usually funds LLC needs (the money required to establish and operate the LLC) out of his or her own pocket. The question is “How is the money or property physically transferred to the LLC?”

Funding an LLC with Cash

Either cash or property can be used to meet your LLC fund requirements. When cash is put into the LLC, the LLC needs to physically issue membership interests (stock) to the person that is putting the money in. If you gave IBM money, you would expect IBM to give you a stock certificate back in exchange.

Your LLC should have a membership ledger and membership certificates, just like a corporation needs a stock ledger and stock certificates. When money is transferred into the LLC, an entry needs to be made in the ledger and a membership certificate needs to be issued.

There isn’t any tax consequence to the transfer of money into the company when this procedure is followed. The LLC fund is increased, but it is not income, because the individual putting the money in “bought” a piece of the company and got membership interests in return.

Funding an LLC with Property

Of course, when someone puts property into the LLC fund, the LLC has to issue a membership certificate or membership interests in exchange for receiving the property.

This is a little trickier than when cash is put into the company.

The property will be transferred using the appropriate transfer forms. For example, a piece of real property will be transferred using a deed. Use a warranty deed, not a quit claim deed, because the title insurance will be transferred into the company with a warranty deed, but not a quit claim deed.

Make sure you go through the steps of issuing membership interests in exchange for the property which funds LLC requirements.

Evaluating LLC Fund Transfers

Evaluating the property is a big issue. The IRS wants to know that you transferred property equal to the value of the membership interests you got back from the LLC.

Technically, when you make any transfer into an LLC you are doing a 351 exchange (an exchange defined in section 351 of the IRS Code). You are exchanging cash or property for membership interests.

Technically, a 351 report needs to be filed with the IRS informing them of what the value of the exchange is. You probably can’t find anyone who funds LLC needs and has actually filed a 351 report.

I call it a “report,” because there isn’t any 351 form. You write a letter to the IRS telling them of the exchange. Nobody knows what that means, so nobody ever does it.

It is a good idea to set the value of property transferred to any LLC fund. At least if you make an effort to establish a value, when the IRS challenges the transfer some time in the future, you will have a “leg to stand on.”

Anyone who funds LLC start up ventures needs to be aware of the formalities required to comply with the IRS, so that the funding occurs without any gain or loss for both the LLC and the individual.