What is a Capital Contribution?

A capital contribution is a contribution of capital in some form to a company by a shareholder. The shareholder does not receive more shares in exchange for the contribution, but she or he does have more equity in the company as a result of the contribution. Furthermore, the basis value of shares already held increases. For the company, the capital contribution is not treated as part of the company's income in most cases although the tax specifics vary by area and law.

The capital involved can vary in nature. Money is an obvious example, but capital contributions can also involve property, services, or promises to render services in the future. The shareholder who provides the capital contribution does so in order to increase equity in the company and to support the company. For example, if two siblings own a company, one sibling might opt to make a capital contribution to infuse the company with cash so that it can complete a project in development. Likewise, a company might solicit contributions of property from part-owners to complete a planned project.

Treatment of capital contributions for tax purposes varies. Companies should make sure that they are familiar with the tax laws in their areas so that they file appropriate tax documentation when they receive capital contributions and other forms of support. An accountant can usually provide advice and assist with filing taxes correctly. Failure to disclose information to tax authorities can subject a company to legal penalties as well as closer scrutiny in the future.

A company which receives capital contributions may be publicly or privately held. In the case of a publicly held company, shareholders can demand accountability from the company, including disclosure of financial statements and related documents. This may be done to show how capital contributions are being used or to determine whether or not shareholders should respond to invitations to contribute capital. Privately held companies are not subject to the same standards and a capital contribution can as a result be more risky in such cases.

When a capital contribution is made, the parties involved will sign a contract known as a capital contribution agreement. This describes the nature of the contribution and sets out the terms which surround it. People should review the contract carefully to make sure that it is accurate and if corrections need to be made, they should happen before capital changes hands and the contract is signed.