There are three ways to fund an LLC: members put in their own cash or property, outside investors buy an ownership stake, or the company borrows money. Each path has its own paperwork, tax rules, and effect on who owns and controls the business. How you fund the company at the outset also matters for liability protection, because courts in every state look at whether an LLC was adequately capitalized when deciding whether creditors can reach members’ personal assets.
Set Up the Bank Account Before Any Money Moves
Get an Employer Identification Number from the IRS first. Multi-member LLCs are required to have one, and single-member LLCs need one if they plan to hire employees or file certain tax returns. Applications go through the IRS website at no cost, and the number is issued immediately.1Internal Revenue Service. Get an Employer Identification Number
Then open a checking account in the LLC’s legal name. Every contribution, investment, and loan should flow through that account, never through a member’s personal account. Mixing personal and business funds is one of the fastest ways to lose the liability protection an LLC is supposed to provide. When finances are entangled, courts are more willing to let creditors pursue members’ personal assets.
Member Capital Contributions
The simplest way to fund an LLC is for members to put cash or property in directly. When a member deposits money or transfers an asset like equipment or real estate, that value gets recorded in a capital account tracking the member’s stake. The account reflects what the member has put in, what they have taken out, and their share of profits and losses over time.
The operating agreement should spell out how much each member will contribute and what ownership percentage they receive. Members often get ownership proportional to what they put in, but the operating agreement can split ownership any way the members agree. Without clear terms in writing, disputes over profit shares and voting power become hard to resolve later.
Non-cash contributions such as equipment, vehicles, intellectual property, or real estate need a fair market valuation at the time of transfer. For property worth more than a few thousand dollars, hire a qualified appraiser who follows the Uniform Standards of Professional Appraisal Practice.2Internal Revenue Service. Publication 561 – Determining the Value of Donated Property Keeping the appraisal on file protects the contributing member and the LLC if the IRS or other members later question the value assigned.
Tax Treatment When You Contribute Property
Contributing property to a multi-member LLC taxed as a partnership generally does not trigger tax at the time of the transfer. Under federal law, no gain or loss is recognized when a partner contributes property to a partnership in exchange for an interest.3Office of the Law Revision Counsel. 26 US Code 721 – Nonrecognition of Gain or Loss on Contribution Appreciated stock, real estate, or equipment can move into the LLC without a taxable event on the day of the contribution.
Your tax basis in the LLC interest equals the cash contributed plus the adjusted tax basis of any property transferred, not the property’s current market value.4Office of the Law Revision Counsel. 26 USC 722 – Basis of Contributing Partner’s Interest Contribute equipment you bought for $10,000 that is now worth $25,000, and your basis in the LLC interest is $10,000.
The $15,000 gap in that example is called built-in gain, and it does not disappear. The LLC has to allocate income, gain, loss, and deductions on that property in a way that accounts for the difference between its tax basis and fair market value at the time of contribution.5eCFR. 26 CFR 1.704-3 – Contributed Property The contributing member typically ends up bearing the tax on that gain later, usually when the LLC sells the property or distributes it to another member.
Property with a mortgage is more complicated. When the LLC assumes the debt, the contributing member is treated as having received a cash distribution equal to the amount of liability relief.6Office of the Law Revision Counsel. 26 US Code 752 – Treatment of Certain Liabilities If the debt is bigger than your adjusted basis in the property, the excess can trigger taxable gain even though no cash came your way. Compare basis against loan balance before you move any encumbered asset into the company.
Single-member LLCs taxed as disregarded entities work differently. Federal tax law treats the business and the owner as the same taxpayer, so moving property in is generally not a taxable event. The built-in gain and encumbered property rules above kick in once the LLC has two or more members or has elected partnership taxation.
Bringing In Outside Investors
Angel investors, venture capital firms, or other third parties can put capital into your LLC in exchange for membership interests. The LLC does not have to repay anything. Interests can be structured as percentage ownership, units, or different classes with varying economic and voting rights.7U.S. Securities and Exchange Commission. Common Startup Securities
Every new member changes the capitalization table. Existing members’ ownership percentages go down unless the operating agreement includes anti-dilution protections that adjust their interests. Those terms need to be negotiated before the investment closes and written into the operating agreement. After any ownership change, amend the operating agreement and update the books to reflect the new members, their contributions, and the resulting percentages.
Securities Law Rules for Equity Raises
Membership interests are securities under federal law. Selling them without registration or an available exemption violates the Securities Act of 1933. Most LLCs raising from a small group of investors use a Regulation D exemption.
The two most common are Rule 506(b) and Rule 506(c). Under 506(b), you can raise an unlimited amount but cannot use general advertising or solicitation, and you may sell to an unlimited number of accredited investors plus up to 35 non-accredited investors in any 90-day period. Under 506(c), general solicitation and advertising are allowed, but every purchaser has to be accredited, and you must take reasonable steps to verify that status.8U.S. Securities and Exchange Commission. Exempt Offerings
An individual qualifies as accredited with a net worth above $1 million excluding a primary residence, or income above $200,000 individually (or $300,000 jointly with a spouse) in each of the prior two years with a reasonable expectation of the same in the current year.9U.S. Securities and Exchange Commission. Accredited Investors
After the first sale in a Regulation D offering, the LLC has to file a Form D notice with the SEC within 15 days. The filing goes through the SEC’s EDGAR system at no charge.10U.S. Securities and Exchange Commission. Filing a Form D Notice Most states also require a separate notice filing under their own securities laws (often called “blue sky” filings), and fees range from $0 to several hundred dollars depending on the jurisdiction and offering size.
Debt Financing
Borrowing lets an LLC raise money without giving up ownership. The main options are commercial bank loans, SBA-backed loans, and loans from members.
Bank and SBA Loans
Commercial lenders offer term loans and lines of credit based on creditworthiness, revenue history, and collateral. Rates vary by loan size, term, and borrower profile. SBA 7(a) loans, the most common government-backed small business loan, cap interest at the base rate (typically prime) plus a spread of 3.0% to 6.5% depending on the loan amount.11U.S. Small Business Administration. Terms, Conditions, and Eligibility With prime near 7.5% in late 2025, effective SBA rates have run roughly from 10% to 14%. SBA loans require that the business cannot obtain credit on reasonable terms from non-government sources. Lenders typically ask for a business plan, financial statements, and tax returns.
Member Loans
A member can lend money to the LLC instead of making a permanent contribution. The advantage is that the LLC repays the loan with interest, returning the money to the member rather than tying it up as equity. To make sure the IRS treats the arrangement as a real loan rather than a disguised capital contribution, sign a promissory note that spells out the principal, a market-rate interest rate, and a repayment schedule.
If the note charges interest below the IRS Applicable Federal Rate, the IRS treats the shortfall as “forgone interest,” which is phantom income taxable to the lender even though no cash changed hands.12Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates The AFR is published monthly and varies by term: short-term (up to three years), mid-term (three to nine years), and long-term (over nine years). Charging at least the AFR for the applicable term avoids the issue.
Convertible Notes
A convertible note is a short-term loan that automatically converts into membership equity when a specified event happens, most often when the LLC raises a set amount of additional capital. Until conversion, the investor holds debt with accruing interest. On conversion, the outstanding principal and accrued interest turn into membership units, usually at a discount to what new investors pay in the triggering round. If the conversion event never happens by the maturity date, the investor can typically choose repayment in cash or conversion at a predetermined valuation. Convertible notes let early-stage LLCs raise money without having to set a company valuation upfront.
Personal Guarantees Cut Through the Liability Shield
Even though an LLC is supposed to shield members from personal liability for business debts, most lenders require members to personally guarantee loans, especially for newer or smaller companies. Under SBA rules, any individual holding at least 20% ownership in the borrowing entity generally has to sign a personal guarantee.13eCFR. 13 CFR 120.160 – Loan Conditions Conventional lenders follow similar practice; it is standard for principals of a privately held entity to personally guarantee business debt.14NCUA Examiner’s Guide. Personal Guarantees
A guarantee makes the member personally responsible for the loan if the LLC defaults. That effectively eliminates LLC liability protection for that specific debt. Lenders may waive the guarantee for financially strong borrowers with solid cash flow, low debt-to-equity ratios, and good collateral, but waivers are uncommon for startups. Read the guarantee carefully so you know exactly how much exposure you are taking on.
Documenting Each Transaction
Every funding transaction should be documented in a written agreement signed by both sides. The two most common agreements are the capital contribution agreement, used when an existing member puts cash or property in, and the subscription agreement, used when a new investor buys membership interests. A subscription agreement also records the investor’s representations about qualifications such as accredited status.
Whichever form fits, it should include:
- Full legal names of all parties
- Current addresses
- The exact dollar amount of cash, or a description and appraised fair market value for non-cash property
- The resulting ownership percentage or number of membership units
- The date the funds or property actually changed hands
For significant non-cash contributions, attach the professional appraisal as an exhibit. The appraiser should have verifiable education and experience valuing the specific type of property involved.2Internal Revenue Service. Publication 561 – Determining the Value of Donated Property Real estate contributions also usually require recording a new deed with the county, which involves a recording fee. Vehicles need title transfers through the state motor vehicle agency. Equipment moves with a bill of sale. Intellectual property may require assignment filings with the USPTO or another relevant office.
For debt, the promissory note is the core document. It should state the principal, the interest rate (at or above the AFR), payment schedule, maturity date, and any collateral. If the note is convertible, include the conversion triggers, discount rate, and valuation cap.
Once cash contributions and investments clear the LLC’s business account, the manager updates the internal capital ledger so each member’s balance matches the bank records. If a transaction brings in a new member, amend the operating agreement to reflect the new ownership structure, and file Form D and any state notices within the applicable deadlines.