What is a Capital Contribution?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 28 April 2020
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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.

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Post 2

Say, you had a lot of extra money and some property. You can make a contribution to a publicly owned company. When you make a contribution to the company, you don't get any new shares of stock, but you do get a higher share of ownership in the company.

But,if you make a loan to the company and expect to be paid back, the company has to pay taxes.

These contributions are not considered part of the company's income. I don't quite understand why this money isn't taxed.

Post 1

Personally, I would be a little reluctant to give a contribution to a publicly-owned company. I can understand if a relative wants to help a small family-owned company by giving a contribution. Even with family businesses, things can get dicey, for one reason or another. I would make sure that everyone involved signed a contract that was reviewed by a lawyer. There's always the chance that the company would be sold. That might be a real problem.

What if the contributor offered property or services they say they will contribute sometime in the future? I can see some real entanglements happening.

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