Does capital contribution into my existing business have to be cash or assets or can it be equal to a partners cash infusion?

UPDATED: Oct 1, 2022

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Does capital contribution into my existing business have to be cash or assets or can it be equal to a partners cash infusion?

I am the owner of an existing business. I have a person buying into the business
with a capital contribution of 50,000 cash and his interest and profit split is
50. What defines my capital contribution? Is it only based on my cash and
property contributions or can it be based on the value equal to my new partners
cash contribution?

Asked on September 15, 2017 under Business Law, Florida


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 5 years ago | Contributor

For tax purposes, it is only your contribution of property or money (e.g. cash; equipment or vehicles at its then-fair-market value; real estate; etc.) So your ability to take business loses as tax deductions (if the business is a pass-through or disregarded entity) is limited to the amount of capital you put in, in terms of things with monetary value. Your ownership percentage, control, and profit participation, however, can be based on other factors, including sweat equity or even just a "premium" given you as the founder. You can have an ownership percentage, etc. equal to your new partner. 
Example: I founded a publishing LLC years ago in which I had the most central roles and was the only full time employee; I also put around $15k of money in. I had two partners: one put in no money and worked part-time; another did not work but put in $100k. I was 55% owner for proft participation and control, the part-time owner was 20%, the investor owner 25%. The during years we ran losses, the investor owner could take 20% of losses, up to $100k worth, as deductions; I could take 55%, but only up to $15k; and the third owner, who did not have a monetary investment, no tax loss.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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