What is capital contribution?

Capital contribution is money or property an owner invests in a business in exchange for ownership interest, increasing the owner's basis and the company's equity. For professional service firm owners, capital contributions fund business operations and affect taxation of future distributions.

Key characteristics

• Owner's investment in business

• Increases the owner's tax basis

• Increases company equity

• Not taxable to the business

• Affects distribution taxation

• Documented in capital accounts

Why it matters for professional service firms

Capital contributions increase your basis, which affects your tax liability when you receive distributions or sell the business. Proper documentation distinguishes contributions from loans. Professional service firm owners should track all capital contributions and understand their tax implications.

Real-world example

Amanda invested $75,000 to start her consulting practice (initial capital contribution). Two years later, I contributed an additional $25,000 during a slow period. Total contributions: $100,000, now her tax basis. When she eventually took a $150,000 distribution, only $50,000 was taxable (the distribution minus the basis). Proper contribution tracking enabled tax-efficient distributions.