Capital con­tri­bu­tions – explained simply

In some situ­ations, a company may need a small financial injection that doesn’t ne­ces­sar­ily need to come from a bank or external investor. When it comes to their own business, many business owners are willing to sacrifice their personal savings for success. In these instances, they are making what is known as a capital con­tri­bu­tion: They are putting their personal assets into the company without receiving direct com­pens­a­tion. This is known as a capital con­tri­bu­tion.

A capital con­tri­bu­tion is a business owner putting their own financial resources or material into their company in order to increase equity capital and improve liquidity. The same applies to part­ner­ships: Each share­hold­er has the option of making their own assets available to the company. A crucial point: The capital con­tri­bu­tion does not increase the company’s profit, only its equity capital. After all, the ad­di­tion­al assets did not arise from business op­er­a­tions, but external funds.

Business owners and share­hold­ers can put both money and benefits in kind into a company.

Cash deposits: The cash deposit is probably the most common type of capital con­tri­bu­tion. This is simply money being made directly available to the company. This can be done through a bank transfer or a cash deposit, for example.

Con­tri­bu­tions in kind: When it comes to con­tri­bu­tions in kind, the business owner makes certain means of pro­duc­tion available to the business. This could be real estate or land, machines and tools, or even vehicles. In addition to these tangible assets, in­tan­gible assets are also among the possible con­tri­bu­tions in kind: Se­cur­it­ies, patents, and licenses can be trans­ferred to a company as private deposits. If you transfer pre­vi­ously used objects into the company, this must be done through a clear action – a change of location, for example.

Transfer of use: In situ­ations of standard con­tri­bu­tions in kind, the assets are trans­ferred to the company and remain privately owned at the time of use. Only use for op­er­a­tion­al purposes is allowed. Use is free of charge, while the amount of the deposit is valued with a fictional rental payment.

Service: In the case of a part­ner­ship, share­hold­ers can make their labour available and begin working privately within the company. An example of this would be if man­age­ment is provided without an open call to external ap­plic­ants.

Capital con­tri­bu­tions can be made to sole pro­pri­et­or­ships and part­ner­ships through their private accounts. A private account is kept in the ac­count­ing de­part­ment for each partner in a part­ner­ship.

Cor­por­a­tions and publicly traded companies have no privacy and therefore no private accounts. Due to this, private deposits are not really possible with limited liability companies and cor­por­a­tions. In the case of a cor­por­a­tion, a payment to the company from a private source always leads to greater shares for the share­hold­ers. The share­hold­ers exchange cash, or non-cash con­tri­bu­tions for shares.

Tax laws like Section 118 deal with private deposits in terms of defining the concept of a profit. As a business owner, you generally tax your company profits, not its assets. Capital con­tri­bu­tions are con­sidered per­form­ance neutral, since there is no profit or loss generated by the payment. This means you can increase your operating assets with a capital con­tri­bu­tion, without affecting your business’s tax status. A profit or loss with a tax impact would only arise if you sell an item that was pre­vi­ously trans­ferred to the company as a capital con­tri­bu­tion. The profit or loss is the dif­fer­ence between the item’s sale value and its value at the time of deposit.

However, it is crucial that you record the deposit’s value correctly. Valuing a cash deposit is easy, but things can become more difficult when ac­cur­ately trying to quantify a con­tri­bu­tion in kind. If the item is pre­vi­ously used, then the original purchase price no longer counts, since the item has decreased in value since the time of purchase.

Under IFRSs, the fair value meas­ure­ment of a financial liability with a demand feature (e.g. a demand deposit) cannot be less than the present value of the amount payable on demand. Items that you have inherited and then put into your company are also valued using this method. However, the decisive factor for the valuation is not the date you inherited, but the date that the deceased acquired the item.

A special feature of private deposits is de­duct­ible input tax: Let’s say you buy a new car as a private in­di­vidu­al, which you then con­trib­ute to your company after one year. When you bought the car, let’s say you paid 19 percent VAT on the purchase price. However, as soon as the car is trans­ferred to your company as a capital transfer, you are entitled to recover the sales from the amortised ac­quis­i­tion costs from HMRC. This also applies to any other items subject to sales that you purchase privately and then con­trib­ute to your company.

Please note the legal dis­claim­er relating to this article.