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

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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

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 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.


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