Capital Contribution
Cash, property, services, or promise transferred by a member to a Texas LLC in exchange for a membership interest, or by an existing member in connection with their existing interest. Includes initial contributions at formation and subsequent capital calls.
A capital contribution is the cash, property, services, or promise of any of these that a member transfers to a Texas LLC in exchange for a membership interest, or that an existing member transfers in connection with the member's existing interest. The term covers both initial contributions made at formation and subsequent contributions made during the LLC's life (commonly called "capital calls" when required by the company agreement).
Defining "contribution"
Under § 1.002(9), a contribution is "a tangible or intangible benefit that a person transfers to an entity in consideration for an ownership interest in the entity or otherwise in the person's capacity as an owner or a member." The definition lists cash, services rendered, a contract for services to be performed, a promissory note or other obligation to pay cash or transfer property, and securities or other interests in or obligations of an entity. It excludes cash or property the person intends to be a loan.
The writing requirement
A promise to make a contribution to a Texas LLC is enforceable only if the promise is (1) in writing, and (2) signed by the person making the promise. § 101.151. This rule has significant practical consequences: an oral commitment to make a future capital contribution is unenforceable. Members who orally agree to "put in another $100,000 if we need it" cannot be made to honor that commitment over their objection. A written company agreement that the member signs can satisfy the requirement.
Changed circumstances do not excuse
Under § 101.152, a member who has made an enforceable promise to contribute is obligated to perform without regard to subsequent death, disability, or other change in personal circumstances. This protects the LLC's reliance on committed capital.
Consequences of breach
When a member fails to perform an enforceable contribution promise, the LLC may demand cash equal to the agreed value of the unperformed contribution (less any partial performance). § 101.153(a). Under § 101.153(b), the company agreement may provide that a defaulting member's interest is reduced, subordinated to the interests of nondefaulting members, or redeemed or sold at a value set by appraisal or other formula. It may also make the interest the subject of a forced sale, forfeiture, a loan from other members in the amount needed to satisfy the promise, or another penalty or consequence.
The interaction of §§ 101.151 and 101.153(b) is the foundation of Texas capital-call practice. Company agreements commonly include a written capital-call mechanism identifying triggers, notice, and consequences for failure to fund; an enumerated set of consequences drawing from § 101.153(b)'s permissive list; and clear documentation of each capital call. Capital-contribution disputes often turn on whether an oral commitment was made, whether the company agreement permits the consequences the LLC seeks to impose, and whether the LLC's records adequately document the agreed value of contributions.
Companion article: Raising Capital in Texas
Practice guide: Texas LLC Operating Agreements
Full entry: Capital Contribution