Owner's contribution refers to the transfer of cash or assets from an entrepreneur's private assets into the business assets. It increases the company's equity, is not operating income and must be properly documented for accounting and tax purposes.
What is an owner's contribution?
An owner's contribution occurs when you, as an owner or partner, transfer assets (e.g. cash, bank balances, tangible assets) into your business. Typical cases include depositing funds from personal accounts into the business bank account, handing over a privately used laptop to the company, or transferring a car into the company fleet.
It is important to distinguish this from a drawing: an owner's contribution brings assets into the business, whereas a drawing moves assets from the business into your private assets. For tax purposes an owner's contribution typically does not generate taxable profit; economically it strengthens equity.
Accounting treatment and journal entries
The entry depends on the type of contribution and the legal form. Principle: owner's contributions are recorded on an equity account or on a dedicated "Owner's contributions" account.
Cash and bank contributions
Cash or bank contributions are the easiest to post. Example for a sole proprietor:
| Example | Entry |
|---|---|
| Deposit of 10,000 EUR into the business bank account | Bank 10,000 EUR to Owner's contributions (Equity) 10,000 EUR |
Contributions in kind
For contributions in kind (e.g. computer, tools, vehicle) you must reasonably value the contributed asset; this value is used as the acquisition or transfer value for subsequent tax depreciation.
| Example | Entry |
|---|---|
| Transfer of a privately used laptop, market value 1,200 EUR | Office equipment/fixed asset account 1,200 EUR to Owner's contributions 1,200 EUR |
Subsequent depreciation (tax depreciation, AfA) is carried out in accordance with the provisions of the Income Tax Act and the depreciation tables.
GmbH and corporations
Special rules apply to corporations (e.g. GmbH): a informal "owner's contribution" into corporate assets can be treated as a shareholder contribution or as a loan. To increase the share capital formalities under the German Limited Liability Companies Act (GmbHG) and the articles of association are required. Contributions that are not made formally are often recorded on a shareholder current account or as a shareholder loan.
Tax implications and special considerations
For tax purposes an owner's contribution should be considered in the following respects:
- Income tax (EStG): Owner's contributions are not operating income and do not increase taxable profit. For contributions in kind, the market value to be applied determines the basis for depreciation.
- Value added tax (UStG): A mere transfer from private assets to business assets is generally not a VAT-liable supply. However, VAT adjustments may become relevant for items for which input VAT was previously claimed or which are subject to special rules. In cases of doubt you should have the effects reviewed under the VAT Act.
- Valuation: For contributions of used assets the realistic market value is decisive. This value determines the tax basis for depreciation and any profit determinations.
Note: For corporations, corporate law requirements (GmbHG) and commercial documentation obligations (HGB) must be observed. Unclear or undocumented contributions can be classified in the financial statements as debt or as a hidden profit distribution.
Practical tips and checklist for freelancers and small businesses
To ensure owner's contributions are recorded correctly and remain tax-neutral, observe the following practical points:
- Documentation: Create a receipt/evidence (deposit slip, handover protocol, photo, market value estimate). For contributions in kind: note condition, date of purchase, original purchase price and estimated market value.
- Correct accounts: For sole proprietors: use an "Owner's contributions" account or the equity account directly. For partnerships: maintain partner accounts. For a GmbH: clearly distinguish between share capital, capital reserves and shareholder loans.
- Valuation and depreciation (AfA): For contributions in kind adopt the documented valuation as acquisition cost and apply depreciation according to tax rules.
- Separation of private and business assets: Do not mix the areas unnecessarily; a clear separation simplifies tax audits.
- Tax review when uncertain: For contributions to corporations, large in-kind contributions or items with prior input VAT claims, consult a tax advisor early.
Conclusion: Owner's contributions are a common means to strengthen a company's liquidity and equity. When properly documented and recorded they are tax-neutral, but incorrect handling can lead to balance sheet or tax disadvantages. Advice from a tax advisor helps prevent mispostings and unpleasant surprises during audits.