What Happens When an LLC Member Refuses a Capital Call?

Where does a duty to fund a capital call come from?

A duty to fund a capital call in a Minnesota LLC comes from the operating agreement or a separate agreement with the company, not from the statute. A contribution made as a member is one made “in accordance with the operating agreement or an agreement between the member and the company” under Minn. Stat. § 322C.0102, subd. 5.

The statute is explicit that membership alone carries no funding duty. Under Minn. Stat. § 322C.0401, subd. 5, “A person may become a member without acquiring a transferable interest and without making or being obligated to make a contribution to the limited liability company.” So the first question in any capital call dispute is what the agreement says. Three things usually decide it:

• Who may make the call. The agreement should say whether the managers, a majority of members, or some other group decides that the company needs more money.
• What the call can require. A contribution need not be cash. Under Minn. Stat. § 322C.0402, it “may consist of tangible or intangible property or other benefit to a limited liability company, including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed.”
• What happens on default. The agreement may set dilution, conversion of other members’ advances into loans, loss of voting rights, or a forced sale.

A call clause that names who decides and what a default costs prevents most of these disputes. My page on capital contribution clauses covers how those clauses are drafted.

Why do LLCs issue capital calls, and what should trigger one?

An LLC issues a capital call when the money it has will not cover what it needs next. The usual reasons are a cash-flow shortfall in ordinary operations, a capital expenditure such as equipment or a building repair, an acquisition or expansion, a lender’s demand to pay down or support a loan, and a cost imposed by a regulator, a judgment, or an uninsured loss. Members often prefer a call to outside money because new investors or lenders bring new terms, new consent rights, or a personal guarantee.

Your capital call clause works better when it names the events that permit a call, so every member can tell a proper call from a squeeze. Triggers worth naming include:

• An operating shortfall. Cash falls below an amount the agreement sets, or below a stated number of months of expenses.
• An approved investment. An acquisition, expansion, or capital project the members or managers approved in advance.
• An unexpected liability. A judgment, a tax assessment, an uninsured loss, or an emergency repair.
• Debt service. A loan payment, a covenant cure, or a lender’s demand for more collateral.
• Reserves. Rebuilding a reserve to the level the agreement requires.

The clause should also say whether each kind of call is mandatory or optional, and cap the amount per call or per year. A member who agreed to fund a capped amount for named purposes knows the exposure. A member who agreed to fund “as needed” does not, and that open-ended promise is where most capital call fights start.

How is a capital call made, and what should a notice of noncompliance say?

Your operating agreement sets the procedure for a capital call. Under Minn. Stat. § 322C.0110, subd. 1, the operating agreement governs “relations among the members as members and between the members and the limited liability company,” so a call that skips a step the agreement requires is open to challenge. A well-run call notice is in writing and states:

• the amount each member owes and how it was calculated;
• the purpose of the call and the agreement provision that authorizes it;
• the payment deadline and how to pay; and
• what the agreement says happens if a member does not pay.

Send the notice the way the agreement’s notice clause requires (often email plus certified mail) and keep proof of delivery. That record matters later, because the first question in any dispute is whether the call was made properly.

If the deadline passes, the next document is usually a notice of default or noncompliance. It should state the unpaid amount, the original deadline, any cure period the agreement allows, the remedy the company intends to apply (interest, conversion of other members’ advances into loans, dilution, loss of voting rights, or a forced sale), and the date the remedy takes effect. Many agreements make a written default notice and a cure period conditions to any remedy, so follow those steps exactly. Whoever sends the notice must still act “consistently with the contractual obligation of good faith and fair dealing” under Minn. Stat. § 322C.0409, subd. 4.

If you receive a noncompliance notice, check three things before the cure deadline: whether the agreement required this contribution, whether the call followed the agreement’s procedure, and whether the amount is right. Respond in writing. If you need the company’s financial records to answer those questions, the information rights covered below give you a way to get them.

How can the LLC collect a contribution a member promised but did not pay?

A Minnesota LLC can enforce a contribution a member was required to make, unless the operating agreement otherwise provides. Under Minn. Stat. § 322C.0403, subd. 1, “If a person does not make a required contribution, the person or the person’s estate is obligated to contribute money equal to the value of the part of the contribution which has not been made, at the option of the company.” That rule is a default: under Minn. Stat. § 322C.0110, the operating agreement governs “relations among the members as members and between the members and the limited liability company” (subd. 1), and “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter” (subd. 2).

Two parts of the collection rule matter in practice. First, the obligation is the company’s to enforce, “at the option of the company,” so, unless the operating agreement otherwise provides, the company chooses whether to demand money or rely on the agreement’s other remedies. Second, the same subdivision says the obligation “is not excused by the person’s death, disability, or other inability to perform personally.”

Who decides for the company depends on its structure under Minn. Stat. § 322C.0407. In a manager-managed LLC, “any matter relating to the activities of the company is decided exclusively by the managers,” except as the chapter otherwise provides (subd. 3). In a member-managed LLC, “Each member has equal rights in the management and conduct of the company’s activities” (subd. 2). When the people in control will not pursue a defaulting member, a member may sue on the company’s behalf. Minn. Stat. § 322C.0902 provides that “A member may maintain a derivative action to enforce a right of a limited liability company if” listed conditions are met. The member must first demand that those in control bring the action, and they must fail to bring it within a reasonable time, unless a demand would be futile.

Leaving does not end the debt: a member who leaves still owes what the member owed while a member, as covered below.

How does a missed capital call disrupt the business and its credit?

A missed capital call hits the business before any lawyer gets involved. The money was called because the company needed it, so the shortfall shows up quickly:

• Liquidity. Payroll, rent, and vendor bills compete for less cash, and the members who did pay end up carrying the company.
• Delayed projects. An expansion, purchase, or repair the call was meant to fund stalls, and deposits or opportunities can be lost.
• Supplier confidence. Late payments lead vendors to tighten terms or demand cash in advance.
• Management time. Enforcing default remedies, recalculating ownership, and arguing about the call pull the owners away from running the business.

A default also affects the LLC’s creditworthiness. Lenders look at whether the owners stand behind the company, and an unpaid call is evidence that at least one does not. Loan agreements often require the borrower to maintain a minimum equity level or report material adverse changes, so a funding failure can become a loan problem. A lender may respond with higher rates, a demand for personal guarantees, or a refusal to renew. The law also gives some creditors a direct claim to an unpaid required contribution, under the creditor rule described below. Be accurate with lenders about which contributions are committed and which are not.

How does a missed capital call change ownership, votes, and distributions?

Under Minnesota’s default rules for an LLC formed on or after August 1, 2015, a member who funds more does not automatically own more. Distributions before dissolution “must be in equal shares among members and dissociated members” under Minn. Stat. § 322C.0404, subd. 1, and in a member-managed LLC “Each member has equal rights in the management and conduct of the company’s activities” (Minn. Stat. § 322C.0407, subd. 2). For those LLCs, dilution exists only if the operating agreement creates it.

That surprises many members, so the details matter:

• Most LLCs. Chapter 322C has governed all Minnesota LLCs since January 1, 2018, except as subdivision 3 provides (Minn. Stat. § 322C.1204, subd. 2). Without an agreement term, a member who funds a call while another member does not keeps the same equal share of distributions.
• LLCs formed before August 1, 2015. For these older companies, special rules apply “subject to the operating agreement of the limited liability company” (§ 322C.1204, subd. 3). Under them, “the voting power of each membership interest is in proportion to the value of the contributions of the members,” as shown in the contribution records the company must keep. Distributions likewise “must be allocated in proportion to the value of the contributions.” For them, a funded call can shift votes and distributions toward the members who paid, if the required records reflect it.
• Board-managed LLCs. In a board-managed LLC, “each member possesses voting power in proportion to the member’s interest in distributions of the limited liability company prior to dissolution” (§ 322C.0407, subd. 4), so voting follows whatever the distribution shares are.
• At the end. In winding up, surplus goes first “to each person owning a transferable interest that reflects contributions made by a member and not previously returned, an amount equal to the value of the unreturned contributions” under Minn. Stat. § 322C.0707, subd. 2. Money a member put in through a call comes back ahead of the equal split, unless the agreement says otherwise.

Agreement-based dilution usually works by formula, and my page on how dilution formulas work walks through the common ones.

How are capital calls handled in a multi-class LLC?

In an LLC with classes of members, the operating agreement decides which classes a call reaches. The agreement governs “relations among the members as members and between the members and the limited liability company” under Minn. Stat. § 322C.0110, subd. 1, and that includes the rights of each class. A common arrangement exempts a preferred or investor class from calls, requires the common or operating class to fund, and applies dilution only within the class that was called. Other agreements let one class fund at its option and earn a priority return on what it adds.

If you hold a class interest, read three provisions together: which classes a call can reach, how a default by one class changes the other classes’ shares and votes, and which class must consent to amend those terms. Unless the agreement says otherwise, amending it still takes every member’s consent under the amendment rule covered below, so one class cannot usually rewrite another class’s funding terms alone.

What consent is needed to change the funding terms or bring in new money?

Changing a Minnesota LLC’s funding terms mid-dispute usually takes every member’s consent. Under Minn. Stat. § 322C.0407, subd. 2, “The operating agreement may be amended only with the consent of all members” in a member-managed LLC, and the consent of all members is also required to amend it in a manager-managed or board-managed LLC (subds. 3 and 4). Those are default rules: the operating agreement itself governs “the means and conditions for amending the operating agreement” under Minn. Stat. § 322C.0110, subd. 1, so an agreement may set a different process.

That default limits the most common response to a refused call: rewriting the agreement to add a dilution penalty. If your agreement does not already contain one, the members who funded generally cannot add it over the objection of the member who did not, unless the agreement allows amendment by less than all members.

Bringing in an outside investor runs into a similar rule. After formation, a person becomes a member as the operating agreement provides, through a merger or similar transaction, or “with the consent of all the members” under Minn. Stat. § 322C.0401, subd. 4. In a member-managed LLC, “An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members” (§ 322C.0407, subd. 2). Whether a particular financing is outside the ordinary course depends on the company’s business. My page on dilution without consent covers where the line usually falls.

How can members negotiate voluntary contributions or a member loan?

When your agreement does not require anyone to fund, the members can still agree on how new money comes in. The choice of structure decides who gets the money back and in what order, so settle it in writing before anyone wires funds. The usual options are:

• Proportional funding. Each member contributes in proportion to the current shares, so nobody’s percentage changes.
• A member loan. The members who are willing lend the money to the company on a written note with an interest rate and a maturity date. A loan does not change ownership, and a member who lends is repaid as a creditor. In winding up, the company “must apply its assets to discharge its obligations to creditors, including members that are creditors” before any surplus goes to members (Minn. Stat. § 322C.0707, subd. 1).
• A contribution with adjusted shares. The funding members get a larger share or a priority return on the new money. Because that changes the operating agreement, it needs the consent the amendment rule above requires.
• Deferred contributions. A member who cannot pay now agrees to a schedule, sometimes with interest or with voting rights suspended until paid.

Incentives can move a reluctant member: a preferred return, a first right to repayment, or a seat on a committee that controls how the money is spent. Unequal capital contributions in an LLC are workable when the agreement says what the extra money earns. They cause disputes when it does not. A loan and a contribution also have different tax consequences, covered below.

When can a member who will not fund be expelled?

A Minnesota LLC member who will not fund can be expelled under the operating agreement’s own terms or by court order. Minn. Stat. § 322C.0602 lists expulsion “pursuant to the operating agreement” and, on the company’s application, judicial expulsion of a member who “has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under section 322C.0409.”

A single missed call is a weaker basis for judicial expulsion than a refusal that is willful or repeated, and the operating agreement must actually have required the contribution for the refusal to be a breach. The statute also lets a court expel a member whose conduct relating to the company’s activities “makes it not reasonably practicable to carry on the activities with the person as a member,” which can fit a funding standoff that has stopped the business.

Expulsion ends the person’s role as a member but not what the person owes. Under Minn. Stat. § 322C.0603, subd. 2, dissociation does not “of itself discharge the person from any debt, obligation, or other liability to the company or the other members that the person incurred while a member.” Under subd. 1 of the same section, “any transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee.” That rule is subject to sections 322C.0504 and 322C.1001 to 322C.1015. My page on expelling an LLC member covers the procedure in more detail.

Can a member sell or transfer an interest without paying the capital call?

A member can transfer an LLC interest, but the transfer does not shed an unpaid contribution. Under Minn. Stat. § 322C.0502, subd. 1, a transfer of a transferable interest “is permissible,” but subject to section 322C.0504 it does not entitle the transferee to “participate in the management or conduct of the company’s activities.” Subdivision 7 answers the funding question. When a member transfers a transferable interest, “the transferor retains the rights of a member other than the interest in distributions transferred and retains all duties and obligations of a member.” The one exception is in section 322C.0602, clause (4), item (ii).

So a member who sells while a required contribution is unpaid still owes it. The buyer takes only the right to the distributions the seller would have received (subd. 2), and becomes a member only as the operating agreement provides, through a merger or similar transaction, or “with the consent of all the members” under Minn. Stat. § 322C.0401, subd. 4. A buyer who does become a member takes on part of the exposure: under § 322C.0502, subd. 8, that transferee “is liable for the member’s obligations under sections 322C.0403 and 322C.0406, subdivision 3, known to the transferee when the transferee becomes a member.”

The same rules apply when one member transfers an interest to another member. The selling member keeps the duties and obligations of a member, and the buying member’s liability for the unpaid contribution turns on what the buyer knew. Check the agreement’s transfer restrictions first: under subd. 6, “A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement is ineffective as to a person having notice of the restriction at the time of transfer.” A clean sale between members should state who pays the outstanding call and adjust the price for it.

What duties apply to members and managers in a capital call fight?

Every member of a Minnesota LLC must act in good faith in a capital call dispute, and fiduciary duties depend on the management structure. Under Minn. Stat. § 322C.0409, subd. 4, a member must “exercise any rights under this chapter or under the operating agreement consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.”

The fiduciary duties of loyalty and care fall on different people depending on who manages the company:

• Member-managed LLCs. “A member of a member-managed limited liability company owes to the company and, subject to section 322C.0901, subdivision 2, the other members the fiduciary duties of loyalty and care stated in subdivisions 2 and 3” (subd. 1).
• Manager-managed LLCs. Those duties “apply to the manager or managers and not the members,” and “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member” (subd. 7).
• Board-managed LLCs. The duties apply “to the governors and not the members” (subd. 8).

For the member who refuses, this means the claim against them is usually breach of the operating agreement. For the people who make the call, it means the call itself is an act subject to fiduciary duties where they are managers, governors, or members of a member-managed LLC, and to good faith and fair dealing in every LLC. The operating agreement may not “eliminate the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4” except as subdivisions 4 to 7 allow (Minn. Stat. § 322C.0110, subd. 3). More on these duties is on my page about fiduciary duties in a Minnesota LLC.

When does a capital call become oppression a court can remedy?

A capital call can support a Minnesota oppression claim when those in control use it to frustrate a minority member’s reasonable expectations. Under Minn. Stat. § 322C.0701, subd. 1, a member may ask a court to dissolve the LLC when the managers, governors, or members in control “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” Under Minn. Stat. § 322C.0110, subd. 3, an operating agreement may not “vary the power of a court to decree dissolution in the circumstances specified in section 322C.0701, subdivision 1, clauses (4) and (5),” and oppression falls under clause (5).

The statute defines oppression narrowly. Under Minn. Stat. § 322C.0102, subd. 18, the conduct must be unfairly prejudicial “because the conduct frustrated an expectation of the applicant member that” meets four listed conditions, including that the expectation was reasonable, material, “known to other members or that the other members had reason to know,” and not contrary to the operating agreement. Conduct “is not oppressive solely by reason of a good faith disagreement as to the content, interpretation, or application of the company’s operating agreement.” A call made for a real business need and applied evenly is a different situation from a call timed to wipe out a member who the majority knows cannot pay.

A court is not limited to dissolution. Under subd. 2, “the court may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members.” On procedure, “A proceeding brought under subdivision 1, clause (5), must be brought in a court within the county in which the registered office of the limited liability company is located” (subd. 3), so check the registered office on the Secretary of State’s record before choosing where to file.

A member harmed personally can also bring a direct action under Minn. Stat. § 322C.0901, subd. 1, “to enforce the member’s rights and otherwise protect the member’s interests, including rights and interests under the operating agreement or this chapter,” but the member “must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company” (subd. 2). Before either claim, a member of a member-managed LLC can test whether a call is real by inspecting the company’s records on reasonable notice under Minn. Stat. § 322C.0410, subd. 1, “to the extent the information is material to the member’s rights and duties under the operating agreement or this chapter.”

In a manager-managed or board-managed LLC, a member may obtain full information regarding the company’s activities, financial condition, and other circumstances “as is just and reasonable” if three conditions are met (subd. 2):

• “the member seeks the information for a purpose material to the member’s interest as a member”;
• “the member makes a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information”; and
• “the information sought is directly connected to the member’s purpose.”

My page on a member’s right to company information covers those requests. Where the relationship cannot recover, a negotiated exit is often the practical answer, covered on my page about buying out a co-owner.

How does a buyout agreement resolve a member who will not fund?

A buyout clause turns a funding standoff into a priced exit, and it works only if it sets the price and payment terms before anyone needs them. When a member refuses a call, the clause lets the company or the other members buy that member’s interest on terms already agreed. The terms that decide whether it works are:

• Trigger events. A refused capital call after any cure period expires, a material breach of the operating agreement, or a deadlock on funding that lasts a stated time.
• Valuation method. An agreed formula (book value, a multiple of earnings, or a price the members update each year) or an independent appraisal, with a process for choosing the appraiser. Some agreements set a lower price for a member who triggered the buyout by defaulting.
• Payment terms. A lump sum at closing, installments over a set number of years with interest, or a promissory note secured by the purchased interest. The clause should let the buyer offset the unpaid contribution against the price.
• Funding the buyout. Company reserves, a bank loan, the buying members’ own money, or insurance proceeds where the trigger is death or disability.
• Who buys. The company (a redemption) or the other members (a cross-purchase), and in what proportions.

Without a clause, a court can still order a buyout in an oppression case. In a proceeding under Minn. Stat. § 322C.0701, subd. 1, clause (5), a remedy may include “the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members” (subd. 2). Agreeing on a price yourselves is usually faster and cheaper. My page on buy-sell agreements for Minnesota LLCs covers drafting these provisions.

Can mediation or arbitration resolve a capital call dispute?

Mediation or arbitration can resolve a capital call dispute, and your operating agreement may require one of them before anyone sues. Look for a dispute resolution clause first. Mediation brings in a neutral person who helps the members negotiate a funding plan, a member loan, or a buyout price. Under Minnesota’s Civil Mediation Act, a mediator is “a third party with no formal coercive power whose function is to promote and facilitate a voluntary settlement of a controversy identified in an agreement to mediate” (Minn. Stat. § 572.33, subd. 2). Arbitration gives the dispute to a private decision maker whose award binds the members.

Minnesota enforces arbitration agreements. Under Minn. Stat. § 572B.06(a), “An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of contract.” If a member disputes whether the clause covers the fight, “The court shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate” (§ 572B.06(b)).

A deal reached in mediation needs the right wording to stick. Under that act, Minn. Stat. § 572.35, subd. 1, “A mediated settlement agreement is not binding unless” it contains a provision stating that it is binding and the required advisories, or the parties were otherwise advised of those conditions. Mediation suits members who want to keep working together. Arbitration suits members who want a final answer without a public court file. Even after dissolution, a company winding up may “settle disputes by mediation or arbitration” under Minn. Stat. § 322C.0702, subd. 2.

When can the members dissolve the LLC over a funding standoff?

When members cannot agree on how to fund the company, dissolution is available by agreement or by court order. Either way, the company then winds up: under Minn. Stat. § 322C.0702, subd. 1, “A dissolved limited liability company shall wind up its activities, and the company continues after dissolution only for the purpose of winding up.”

Voluntary dissolution

Members can choose to dissolve. Under Minn. Stat. § 322C.0701, subd. 1, an LLC is dissolved upon “an event or circumstance that the operating agreement states causes dissolution” (clause (1)) or “the consent of all the members” (clause (2)). In winding up, the company “shall discharge the company’s debts, obligations, or other liabilities, settle and close the company’s activities, and marshal and distribute the assets of the company,” and it may “file with the secretary of state a statement of dissolution stating the name of the company and that the company is dissolved” and later a statement of termination (§ 322C.0702, subd. 2). After creditors are paid, members get back unreturned contributions before any equal split, as described above. If one member blocks unanimous consent, voluntary dissolution is off the table unless the agreement names another dissolution event.

Court-ordered dissolution

A member can ask a court to dissolve the company when the funding deadlock has made the operating agreement unworkable. Under § 322C.0701, subd. 1, clause (4)(ii), a court may dissolve the LLC on a member’s application on the ground that “it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization and the operating agreement.” That ground does not require anyone to have acted oppressively, so it fits a standoff where both sides act in good faith but the company cannot operate. An operating agreement may not “vary the power of a court to decree dissolution in the circumstances specified in section 322C.0701, subdivision 1, clauses (4) and (5)” (Minn. Stat. § 322C.0110, subd. 3). In a proceeding under clause (4) or (5), the court may also order judicial supervision of the winding up, “including the appointment of a person to wind up the company’s activities” (§ 322C.0702, subd. 5). The prospect of a court-supervised wind-down is often what brings members back to a buyout.

How do company creditors and personal liability fit in?

A Minnesota LLC member is not personally liable for company debts just because a capital call went unfunded. Under Minn. Stat. § 322C.0304, subd. 1, the company’s debts “do not become the debts, obligations, or other liabilities of a member, manager, or governor solely by reason of the member acting as a member, manager acting as a manager, or governor acting as a governor.”

There is one statutory route from a creditor to a member’s unpaid contribution. Under Minn. Stat. § 322C.0403, subd. 2, “A creditor of a limited liability company which extends credit or otherwise acts in reliance on an obligation described in subdivision 1 may enforce the obligation.” A lender that extended credit relying on members’ contribution commitments may be able to collect a required contribution directly from a member who did not pay it.

Personal guarantees are a separate matter. A member who signed a guarantee of the company’s loan owes under that contract, whatever the operating agreement says about capital calls, and that exposure is often what drives a member to fund a call. Liability on other grounds, such as piercing the veil, follows its own rules.

Are capital calls taxable, and what are the tax effects of a missed contribution?

Funding a capital call is generally not a taxable event for a member of an LLC taxed as a partnership. Unless the LLC elects otherwise, a domestic LLC with two or more members is classified as a partnership and a single-member LLC is “Disregarded as an entity separate from its owner” under Treas. Reg. § 301.7701-3(b)(1). For a partnership-taxed LLC, 26 U.S.C. § 721(a) provides: “No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.” Paying a call raises your basis: under 26 U.S.C. § 722, the basis of an interest acquired by a contribution “of property, including money,” is “the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution,” as later adjusted under 26 U.S.C. § 705.

A missed contribution matters for taxes mostly through basis and capital accounts:

• Loss limits. Under 26 U.S.C. § 704(d)(1), a partner’s share of partnership loss “shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss occurred.” Because § 722 measures basis by the money and property contributed, a call you did not pay adds nothing to your basis, and losses beyond your basis carry forward instead of being deducted that year.
• Capital accounts. The members who funded get credit in their capital accounts for what they paid. If the agreement then dilutes the defaulting member or forfeits part of that member’s interest, capital accounts shift, and the members should have the LLC’s tax preparer model the effect before the remedy is applied.
• Loans versus contributions. Money a member lends to the company on a note is a debt of the company rather than a capital contribution. Decide which one it is before the money moves, document it, and have the tax preparer confirm how it is reported.

The sections quoted above govern LLCs taxed as partnerships. If your LLC elected to be taxed as a corporation or an S corporation, different rules apply.

Can insurance cover a member’s funding shortfall?

Insurance does not usually pay because a member refuses to fund a capital call. A policy pays for the events it covers, and a member’s choice not to contribute is rarely one of them. Insurance still has a place in a funding plan:

• Life and disability insurance on each member can fund a buyout or the member’s contribution when the trigger is death or disability. Because a contribution obligation survives death or disability, as covered above, a member’s estate can be left owing a contribution it cannot pay without liquid funds.
• Key person insurance replaces revenue lost when an owner the business depends on dies or is disabled, reducing the need for an emergency call.
• Business interruption coverage pays for income lost after a covered event such as a fire, which can make a call unnecessary.

Read each policy’s terms with your broker. For a member who simply will not pay, the protection comes from the operating agreement: a clear call clause, default remedies, and a funded buyout provision.

How does a single-member LLC owner make and record a capital contribution?

A single-member LLC owner makes a capital contribution by putting money or property into the company as equity and recording it, separate from any loan. A contribution may consist of “tangible or intangible property or other benefit to a limited liability company, including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed” under Minn. Stat. § 322C.0402. No minimum initial capital contribution is required: under Minn. Stat. § 322C.0401, subd. 5, a person may become a member “without making or being obligated to make a contribution to the limited liability company.”

Practical steps keep your contribution clean:

• Move the money from your personal account to the LLC’s account and label the transfer as a capital contribution, both for the initial contribution and later ones.
• Record it in a short written consent or a capital account ledger showing the date, amount, and form of each contribution.
• Decide contribution or loan before the money moves. A loan should have a written note. In winding up, the company pays creditors, “including members that are creditors,” before returning contributions (Minn. Stat. § 322C.0707, subd. 1), so the label changes the repayment order.
• Update the records when a second member joins. Your recorded contributions become the starting point for capital accounts and, for an LLC formed before August 1, 2015, can affect voting and distributions under Minn. Stat. § 322C.1204, subd. 3.

For federal tax purposes, a single-member LLC is disregarded unless it elects otherwise, and “its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner” under Treas. Reg. § 301.7701-2(a). Clean records still matter, because commingled money is one of the facts creditors point to when they try to pierce the veil. My page on the legal requirements for LLC capital contributions covers initial contributions in more detail.

How should LLC members approach a capital call dispute?

I suggest reading the operating agreement first, then the chapter 322C default rules, and matching the remedy to what you actually want: the money, a change in ownership, or an exit. That order works because the agreement decides whether the contribution was required and what a default costs, while the statute fills every gap.

For a member asked to fund, the key questions are whether the agreement required this contribution, whether the call followed the agreement’s procedure, and whether the call has a real business purpose. For members who funded, the questions are whether to collect under Minn. Stat. § 322C.0403, apply the agreement’s dilution terms, or pursue expulsion. Under Minn. Stat. § 322C.0110, subd. 2, “this chapter governs the matter” only to the extent the operating agreement does not provide for it, so the exact wording of your agreement controls most of the answer.

A capital call dispute is often the first sign of a wider Minnesota ownership dispute. If you would like me to analyze a capital call, an operating agreement’s funding terms, or a member’s refusal, email aaron@aaronhall.com with a brief description of the situation.