Membership & Members Interest

Differences between loans and capital contribution for members and outsiders.A loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest

Member’s Loan

In simple terms, this is the money you have borrowed, or the company has loaned you.

A member’s loan arises when a close corporation makes a loan (or an advance which is subsequently converted into a loan) to a member of that close corporation. The loan is shown as an asset in the books of the close corporation however it is a liability in the hands of the member.

As with a company, a close corporation is a legal person in its own right. In other words, the close corporation and the owners are separate legal entities. This means that all the transactions between the members and the close corporation must be separately disclosed.

Loans to and from members need to be separately disclosed. If the amounts will be repaid in the short term, they should be disclosed as current assets or current liabilities. If these loans are long term in nature, they should be disclosed as noncurrent assets or non-current liabilities.

Outsider Loan

The company can accept loans from its directors, Individuals, Banks etc. However, if the company accepts any amount from any outsider, then it shall be treated as deposit as per the Companies Act, 2013 and it needs to comply with all the deposits rules.

Let us assume the term outsiders here are ‘Individuals, ‘Banks/Financial Institution’.

A private limited company can accept loans from outsiders, if the company has authority to do so in its Articles.

If not, then the company shall alter its Articles accordingly. Then after passing a board resolution by the board of directors in board meetings, such company can accept loans from outsiders on the terms and conditions mutually agreed by them.

Member’s Capital Contribution

Members contributes capital to the company in exchange for a membership interest.

The capital contribution provided by all the members can be in the form of cash and/or assets, and the provision of services in connection with forming the corporation.

In the case of a close corporation, the contribution of services will qualify as a contribution only if the services are in connection with the formation of the corporation, for example, legal services, and these may not be in the form of future services, such as future consulting or management services to be provided by the member.

If the amount of a member’s contribution is changed, the details of the increase or decrease in contribution must be made available and a new founding statement will have to be drawn up.

Members Interest

  • The member’s interest refers to the percentage ownership that each member has in the company.
  • The contributions by members need not be in the same proportion as the members’ percentage interest.
  • It is the members’ interests, and not their contributions, which determine the proportion in which profits and losses are to be shared.

The Difference between Loans and Members Contribution

Basically, Capital contribution buys ownership and is not repaid. A loan on the other hand does not give ownership and is supposed to be repaid.

  • Capital contribution is equity. This means that the founder is putting their own money into the company in exchange for ownership. If the startup does extraordinarily well, the equity value will increase. If the startup fails, the equity value will decrease. As contributing capital, the founder takes an increased position in the success/failure of the firm.
  • A loan is debt. This means that the founder is putting their own money into the company in exchange for interest payments. If the startup does extraordinarily well, the founder is only entitled to the interest payments that were agreed upon when the loan was issued. If the startup fails, the founder may be entitled to the startups assets to pay off the loan.