DEALING WITH LLC DISTRIBUTION OF PROFITS AND LOSSES IN AN OPERATING AGREEMENT.

Law Offices of Kiritsis & Associates

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Author: John Kiritsis, Esq., CPA, MBA, MS, JD, LL.M

 

The distribution of profits and losses among members of a limited liability company (LLC) is a crucial aspect of the business that should be addressed in the operating agreement. The operating agreement should include the following information related to the distribution of profits and losses:

 

Profit and loss allocation: The operating agreement should specify how profits and losses will be allocated among the members. This could be based on a set percentage, a tiered structure, or some other agreed-upon method.

 

Distributions: The operating agreement should specify when distributions will be made and the method for calculating the amount of the distribution. This could be based on a set schedule, such as quarterly or annually, or based on the financial performance of the business.

 

Capital accounts: The operating agreement should establish individual capital accounts for each member, which will reflect their contributions to the business and their share of profits and losses.

 

Minimum distributions: The operating agreement may specify a minimum amount that must be distributed to each member, even if the business is not profitable.

 

Right of first refusal: The operating agreement may include a right of first refusal provision, which gives existing members the right to purchase an outgoing member's share of the business before it is sold to a third party.

 

Distributions to non-members: The operating agreement should specify if and how profits or losses will be distributed to non-members, such as investors, partners, or other stakeholders.

 

Having a clear and detailed operating agreement can help ensure that the distribution of profits and losses is handled fairly and transparently among members, and can minimize the potential for disputes. It's important to review the operating agreement periodically and make updates as necessary to reflect changes in the business or the members involved.

Sources:

New York Business Corporation Law

New York Limited Liability Company

New York General Obligations Law

NYS Office of Professions

U.S. Constitution

 

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