How to Fund an LLC
Most new LLCs start with the owner's own money. After that come loans, investors, crowdfunding, grants, and money from family and friends. Below is how each one works, what it costs you, and what to have ready before you take the money.
Personal funds
Your own money is the usual starting point. You move cash from your savings into the LLC's business account and record it as a capital contribution, with the date, the amount, and which member it came from. Single-member LLCs need that record too. It is how you show later what went in, and what came back out to you as a distribution. Many owners keep it in the operating agreement or in a short signed consent.
If the business pays for its own growth from sales after that, you keep all of the ownership. Growth is capped at what sales can cover.
Retirement money
Taking money out of a 401(k) or IRA before retirement age usually means income tax on the withdrawal, and often an extra penalty on top. Some setups avoid that, and they carry their own rules. Ask a tax professional before you move any retirement money into the business.
One account for business money
Once the money is in the LLC, pay business costs from the business account and nothing else. Paying a personal bill from that account, or a business bill on your personal card, is commingling. It gives a creditor an argument that you and the LLC are the same person.
Business loans
Borrowing leaves you as the only owner. The lender gets its money back with interest and has no say in how you run things as long as the payments arrive.
- When this fits
- You have sales already, or a purchase that will bring them in, such as a delivery van or stock you already have buyers for. A line of credit helps when cash comes in unevenly. A term loan covers one large purchase. Equipment financing uses the equipment as the lender's security.
- What it costs you
- Interest, fees, and a payment that is due every month whether sales come in or not. Lenders usually ask the owner of a new LLC to sign a personal guarantee, which means you owe the debt yourself if the LLC can't pay. Some lenders also file a lien on business assets.
- What to have ready
- Your formation documents and EIN, a business bank account with a few months of statements, a one-page plan for how the money gets spent and paid back, and your personal credit history. With a new business, the lender is mostly judging you.
SBA-backed loans
Banks and other approved lenders make these loans. The Small Business Administration guarantees part of each one, which makes lenders more willing to say yes to a young company.
$5 million
7(a) loan maximum
You can use it for working capital, equipment, or real estate.
$5.5 million
504 loan maximum
For land, buildings, and equipment that lasts many years. It can't pay for working capital or inventory.
$50,000
Microloan maximum
About $13,000
Average microloan
Limits as published by the SBA; check sba.gov for current figures.
Investors
An investor buys part of the LLC. There are no monthly payments. In return the investor gets a share of the profits and some say in big decisions.
- When this fits
- You need more than a lender would give you, and the business could be worth much more in a few years. For most LLCs the realistic path is angel investors, people who write checks to early companies directly. Venture firms usually want a corporation, so an LLC normally has to convert to one before a venture firm will invest.
- What it costs you
- A slice of every future profit and of the sale price if you ever sell. The investor also gets whatever rights the operating agreement gives members, which can include votes or a veto on major moves. Investors also expect a return, which usually means pressure to grow fast.
- What to have ready
- An operating agreement that has a process for admitting new members, a number for how much you're raising and what percentage it buys, and simple financials that show where the money goes.
Selling an ownership stake in an LLC is normally a securities offering under federal and state law. The offering has to be registered or fit an exemption, and exemptions often come with filings and limits on who can invest. Talk to a securities attorney before you take money in exchange for a share of the business.
Crowdfunding
A campaign collects small amounts from a lot of backers, usually on a website built for it. There are two main kinds, rewards and equity.
- When this fits
- Rewards campaigns suit a product people will pre-order: backers pay now and get the item or a perk later, and nobody gets a share of the LLC. Equity campaigns, where backers do get a share, suit companies that are ready for many small owners and the paperwork that comes with them.
- What it costs you
- Platform and payment fees, the cost of making and shipping rewards, and weeks of promotion. Many platforms pay out only if you reach your goal. An equity campaign is a securities offering, so the rules in the Investors section apply, and it has to run through a registered platform.
- What to have ready
- A prototype or sample people can see, a goal built from real costs including fees and shipping, photos or video, and a list of people who will back you on the first day.
Grants
Grant money doesn't get paid back, so there isn't much of it and plenty of people apply. Small-business grants mostly come from state and local economic development offices, utilities, and private foundations. Many are open only to a particular industry, location, or kind of owner.
Read the eligibility rules before anything else, because they rule out most applicants. Expect to send a budget and a plan for the money, and to report on how you spent it afterward. Your city or county economic development office can tell you what is open locally.
Family and friends
A relative or friend can usually move faster than a bank and ask fewer questions. If the business struggles, though, the strain lands on the relationship.
- When this fits
- The amount is modest, the person can afford to lose it, and the two of you have agreed in writing whether it is a loan, a gift, or a share of the LLC.
- What it costs you
- For a loan, repayment on the schedule you agreed to. For a share, they become a member with the rights your operating agreement gives members, and the securities rules in the Investors section apply.
- What to have ready
- A signed note or agreement with the amount, the terms, and what happens if the business closes. For a larger loan, ask a tax professional what interest rate to charge.
Frequently Asked Questions
Can I put my own money into my LLC and take it back out?
Does an LLC need a business bank account before it can get a loan?
Will a lender look at my personal credit?
Do I have to tell the IRS about a capital contribution?
Next steps
This page is general information. It isn't legal, tax, or securities advice.
Have the LLC in place before the money arrives
Most lenders will want to see your formation documents, an EIN, and a business bank account before they talk numbers.