Missouri Real Estate Lawyer

The capital account has a very important purpose.  It is where the LLC tracks all of the money and property
contributed to the LLC by its owners (also called members).  Proper maintenance of the capital account is critical to making sure your investment is fully accounted for and to avoiding disputes among the members of the LLC.

Maintaining the Capital Accounts of Your Missouri LLC

You can use a simple excel spreadsheet or a software program to maintain the capital account of each member of the LLC.  Generally, a member’s capital account is increased by the amount of money contributed to the LLC by the member.  The capital account is also generally increased by the fair market value of the property contributed to the LLC by the member, the member’s share of net profit earned by the LLC, and by the liabilities of the LLC that are assumed by the member.  The member’s capital account is generally decreased by the amount of money distributed by the LLC to the member, the fair market value of property distributed by the LLC to the member, certain expenses of the LLC allocated to the member, and losses and deductions of the LLC that are allocated to the member.

For example, when you and your partners start your LLC, each of you might contribute a certain amount of money to the LLC for its operating expenses, to purchase assets and to cover other needs of the LLC.  If the LLC has three members, and each member initially contributes $10,000 to the LLC, then each member starts with a capital account balance of $10,000.  Additionally, since each member contributed the same amount of money to the startup LLC, the members might agree that each member will own one third of the startup LLC and that each member will accordingly receive one third of the net profit earned by the LLC.  Likewise, if the LLC earns a net loss, then the members might agree that the capital account of each member will be reduced by one third of the loss.

Later, the LLC might need additional capital.  The capital accounts of the contributing members should be increased by the amount of their respective additional contributions.  How such additional contributions affect the ownership percentages of the members, the weight of voting, and other matters, depends on how the operating agreement is structured.

In addition to a capital contribution, which increases the capital account of a member, a member can loan money to the LLC.  In that case, the capital account of the member making the loan to the LLC will not typically be increased by the amount of the loan.  Rather, the member making the loan will usually be regarded as a creditor of the LLC like any other lender, and the LLC will be obligated to service the principal and interest on the note the same as any other loan.  Whether money provided to an LLC by a member is done in the form of a capital contribution or a loan is an important distinction, as a member is not entitled to receive interest on a contribution, unless such interest is permitted by the operating agreement.

Avoid Capital Account Disputes

Naturally disputes can arise when a member provides money to an LLC without clearly communicating, and documenting, the form in which the money is provided.  Disputes can likewise occur when a member provides property to an LLC, as property can be provided as a contribution, in which case title to the property will typically transfer to the LLC, or it can be provided in the form of a lease, in which case title would not transfer to the LLC.  In the first case, the capital account of the member providing the property will be increased by the amount of the fair market value of the property, and in the second case the capital account of the member will not so increase.

One Missouri case, Country Club of the Ozarks, LLC v. CCO Investments, LLC, illustrates the problems that can arise when money is provided to an LLC without clearly communicating the form in which it is provided.  In this case, Country Club of the Ozarks, LLC (Country Club) and an individual, Cecli Van Tuyl, formed a Missouri LLC called CCO Investments, LLC (CCO).  (Yes, an LLC can be a member of another LLC.)  The two members formed CCO for the purpose of constructing a golf course and developing the surrounding property.  Country Club contributed to CCO property valued at $855,000.  Van Tuyl contributed to CCO the initial amount of $1,000,000 in cash.  Van Tuyl later provided an additional amount of $1,214,380 to CCO, but apparently his capital account was not increased by that amount, and there was no other evidence about whether this amount was a loan or a contribution.  This additional amount was probably simply deposited by Van Tuyl into CCO’s bank account.  CCO later sold the land, and a dispute then arose between the two members of CCO about whether Van Tuyl provided the $1,214,380 to CCO as a loan or as a contribution.

Van Tuyl claimed that it was a loan made by him to CCO and that he was entitled to receive interest from CCO on the loan.  Country Club contended that the money was a contribution to CCO and that Van Tuyl was therefore not entitled to interest on those funds.  The operating agreement of CCO stated that CCO shall establish a capital account for each member of CCO and that the capital account of each member shall be increased “by the amount of any Money actually contributed by the Member”.  Although the books of CCO apparently did not reflect an increase of Van Tuyl’s capital account by $1,214,380, the court nonetheless found that the money was a capital contribution by Van Tuyl to CCO and that CCO was therefore not obligated to pay interest to Van Tuyl on that amount.

Because the members of CCO failed to clearly account for the form in which the $1,214,380 was provided to CCO by Van Tuyl, they ended up in costly litigation, and Van Tuyl was out the interest he expected to receive on that money.  You can avoid such costly disputes by diligently maintaining your LLC’s capital account and by clearly accounting for the money and property provided to your LLC by its members.  In addition to determining whether money provided to the LLC is a contribution or a loan, ascertaining the fair market value of property can be tricky and further complicated when the property secures as debt.  Consult your attorney or CPA if you have questions about how to classify money or how to adjust the capital account of a member contributing property to the LLC.

The information provided in this article is general in nature, and it is not intended as legal advice.  Your circumstances may be unique, and you should therefore consult knowledgeable legal counsel about how the information or concepts discussed in this article might apply to you or your business.

Michael Sewell has a MBA, numerous years of high level business experience with multi-billion dollar corporations, and he has practiced law in Missouri since 2005.  Michael Sewell is the owner of Sewell Law, LC, which provides litigation other legal services to businesses.

Feel free to contact Michael for an initial consultation at no charge: 314.261.7528; michael@stlouisllcattorney.com; www.stlouisllcattorney.com.

This article was published on March 3, 2015.

© 2015 All rights reserved worldwide.