A distribution from a limited liability company (LLC) is a payment of cash or property made by an LLC to the LLC\u2019s owners, also known as members. Although state law sets forth certain default rules, LLC members can specify in the LLC\u2019s operating agreement when and how profits are allocated, distributed, and taxed.<\/p>\n
Distribution Method and Timing<\/strong><\/p>\n Under the default rules provided by most state LLC statutes, an LLC is not required to make any distributions to members before they withdraw from the LLC or it is dissolved. It is prudent for LLC members to create an operating agreement that specifies the method and schedule of distributions. Distributions can be made on a regular basis, such as monthly, quarterly, or at the end of the fiscal year; or based on specific events, such as the sale of assets or the liquidation of a member\u2019s interests.<\/p>\n When determining the timing and size of distributions, the compensation needs of members must be considered alongside the needs of the business to grow earnings, cover expenses, and retain sufficient cash reserves. Often, distributions are made to enable members to pay taxes they owe on the LLC\u2019s profits: because LLCs are generally pass-through entities, their members must pay taxes on LLC profits regardless of whether they receive a distribution of those profits.<\/p>\n Proportionate versus Disproportionate Distributions<\/strong><\/p>\n Distributions can be made in direct proportion to how much of the LLC each member owns\u2014an amount that is typically based on an owner\u2019s capital contribution to the business. This is not required, however. Although state LLC laws may provide a default rule that members must share income distributions equally regardless of how much each member invested, the owners can override this in the operating agreement.<\/p>\n Profit Allocations versus Profit Distributions<\/strong><\/p>\n Profit allocation and profit distribution are not the same thing in an LLC.<\/p>\n Note: Members should talk with their professional advisors about the LLC tax election that is most advantageous for their business model.<\/p>\n Recordkeeping<\/strong><\/p>\n It is very important for the LLC and its members to maintain accurate records of distributions, such as a copy of the payment check or a printout of the bank transfer. This information should be kept with other business accounting records such as financial reports, cash flow statements, accounts receivable, payroll, and tax documents.\u00a0 Further, to keep track of each member\u2019s interest in the LLC, LLCs should keep records called capital accounts to track their members\u2019 initial investments in the LLC, subsequent contributions to the company, distributions they receive from the LLC, and the percentage of profit attributable to each member according to their membership interest percentage.<\/p>\n A capital account is not an actual, physical bank account. It is a recordkeeping account that exists only on paper, such as a spreadsheet, and effectively serves as a ledger. As with all recordkeeping, details matter. Detailed recordkeeping is important not only at tax time but also when a member leaves or the LLC is dissolved.<\/p>\n","protected":false},"excerpt":{"rendered":"\n
\nAs mentioned, LLC members may need to receive regular LLC profit distributions to cover the tax liabilities on their profit allocations.<\/li>\n<\/ul>\n