Profit Distribution and Limited Liability Companies

By Jennifer Reuting

With most entities, if a shareholder owns 10 percent of the company, he can receive only 10 percent of the profits that are distributed, no more and no less. With an LLC, you have freedom to choose! You don’t have to split the profits in accordance with the percentage of ownership.

If all the members agree, and you have a legitimate reason for doing so (the IRS won’t accept tax evasion as a legitimate reason!), you can give 40 percent of the profits to someone who owns 20 percent of the business, or give 10 percent to someone who owns 50 percent.

For example, say you and John decide to partner together to create a web design company. You choose to partner 50/50, and you alone are putting in the initial $20,000 needed to get the venture started. You’ll both be sharing the workload. But do you think that splitting the profits 50/50 is fair when you’re the only one putting up capital?

So being the smart cookie that you are, you and John decide to form an LLC. You distribute 50 percent of the company to John and 50 percent to yourself. In the LLC’s operating agreement, you agree that you get first dibs on the profits until they reach $22,000 (giving you 10 percent interest on your initial investment). After you’re paid off, you and John will split the profits equally.