A capital contribution is when a shareholder provides a company with capital, which can be money, property, services, or promises, to increase the equity of the company. The tax treatment of capital contributions varies, and a capital contribution agreement is signed to establish the terms.
A capital contribution is a capital contribution of some form to a company by a shareholder. The shareholder does not receive more shares in exchange for the contribution, but they do have more equity in the company as a result of the contribution. In addition, the base value of shares already held increases. For the business, the capital contribution is not treated as part of business income in most cases, although the tax details vary by area and by law.
The capital involved may vary in nature. Money is an obvious example, but capital contributions can also involve property, services, or promises to provide services in the future. The shareholder who provides the capital contribution does so in order to increase the equity of the company and support it. For example, if two brothers own a business, one brother might choose to make a capital contribution to infuse the business with cash so he can complete a development project. Similarly, a business may solicit property contributions from partial owners to complete a planned project.
The treatment of capital contributions for tax purposes varies. Businesses should ensure that they are familiar with the tax laws in their areas so that they submit the proper tax documentation when receiving capital contributions and other forms of support. An accountant can usually provide advice and assistance in filing taxes correctly. Failing to disclose information to tax authorities can subject a company to legal penalties, as well as more detailed scrutiny in the future.
A company that receives capital contributions can be publicly or privately owned. In the case of a publicly traded company, shareholders can demand accountability from the company, including disclosure of financial statements and related documents. This can be done to show how capital contributions are used or to determine whether or not shareholders should respond to invitations to contribute capital. Private companies are not held to the same standards, and as a result, a capital contribution may be riskier 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 establishes the terms surrounding it. People should review the contract carefully to make sure it is accurate, and if corrections are necessary, they should occur before the capital changes hands and the contract is signed.
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