When a capital contribution is made, the parties involved sign a contract known as a capital contribution agreement.
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 has more participation in the company as a result of the contribution. In addition, it increases the base value of shares already owned. For the company, the capital contribution is not treated as part of the company’s income in most cases, although the tax specifications vary by area and by law.
The capital involved may vary in nature. Cash is an obvious example, but capital contributions can also involve goods, services, or promises to provide services in the future. The shareholder who provides the capital contribution does so to increase the equity of the company and to support the company. For example, if two brothers own a company, one brother may choose to make a capital contribution to inject money into the company so that he can complete a project in development. Likewise, a business may request contributions from co-owners to complete a planned project.
The treatment of capital contributions for tax purposes varies. Companies should make sure they are familiar with the tax laws in their area so that they file the proper tax documentation when receiving capital contributions and other forms of support. An accountant can usually advise and assist in the correct payment of taxes. Failure to disclose information to tax authorities may subject the company to legal penalties, as well as increased scrutiny in the future.
A company that receives capital contributions can be public or private. In the case of a public company, the shareholders can demand the accounting of the company, including the disclosure of the 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 these cases.
When a capital contribution is made, the parties involved sign a contract known as a capital contribution agreement. It describes the nature of the contribution and establishes the terms that surround it. People should review the contract carefully to make sure it is correct, and if corrections are necessary, they should be made before the capital changes hands and the contract is signed.