Entrepreneurs often have to dip into their own pockets to fund a small business until it becomes profitable. When owners of a limited liability company, known as members, put up their own money to help the company stay in business, the investment can be treated as an equity contribution or a loan to the company that it has to pay back.
An LLC is an independent business entity that is formed under state law by filing formation paperwork with a state agency. Once the state accepts the LLC's formation paperwork, the company exists as an entity that is legally separate from its owners. Under the law, the LLC can do many of the things that an individual does, including owning property, entering into contracts, taking out loans, and hiring employees. The legal independence of an LLC means that its owners can enter into arms-length transactions with the company.
Under state law, LLC members can capitalize or fund the company through equity contributions or debt. Money that a member contributes to the LLC that the company does not have to repay is considered an equity contribution that establishes or increases the member's ownership interest in the company. Money that a member contributes to the company that does not affect the ownership structure and which the company has to pay back is a loan, and falls under the category of funding the company through debt. There is no limit to the amount of money a member can loan his own company. It is extremely important for the lender and the LLC to maintain separate bank accounts, according to Fit Small Business.