Partners, shareholders, or LLC members may be required to contribute capital to their respective entities under the terms of a partnership agreement, LLC operating agreement, or corporate bylaws. Ideally, these organizational documents will specifically dictate the who, when, and how much for every capital contribution that is to be made, and the consequences for failure to comply. The provisions can be more easily drafted if the need for additional capital is foreseen and estimated, but general authorizations should be made for unforeseen needs as well.
A capital call requirement may be triggered by the decision of a managing or majority member, by vote, or, in the case of decision-maker deadlock, some other method as set forth in the company’s governing documents. Once a capital call is triggered, the affected shareholders, partners or members are notified, and they are given a certain period to comply with the call. The corporate documents will also generally provide for penalties if a proper capital call is ignored or rejected, ranging from monetary penalties and dilution of ownership to expulsion from the entity.
Including a capital call provision in your governing documents not only allows the entity to obtain additional capital as needed, but informs members, partners, and shareholders of their responsibilities if more capital is required. This also creates an opportunity to discuss fully with their business colleagues the terms by which capital calls, if any, will be made.
If capital calls are abused because of shareholder or member disputes, litigation may be necessary.
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