LLC Distributions

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This page will explain what LLC Distributions are and how they’re used.

LLC Distributions may also be called:

  • LLC Capital Distributions
  • LLC Profit Distributions
  • LLC Distribution of Profits

These all mean the same thing.

What is an LLC Distribution?

An LLC Distribution is when Members (owners) of an LLC take money out of the LLC bank account and issue profits to themselves.

Instead of receiving income in the form of a W2 salary (aka wages), the LLC Members “pay themselves” via LLC Distributions.

How does an LLC make Distributions?

An LLC makes distributions by transferring money from the LLC bank account to an individual Member.

You can make an LLC Distribution in any of these ways:

  • Check
  • Internal transfer
  • Electronic funds transfer (EFT)
  • Wire transfer (including SWIFT)
  • Cash withdrawal (including ATM)
  • Transfer from an online account (like PayPal, Venmo, Stripe, Zelle, etc.)

The most common methods are writing checks and bank transfers.

How much and how often should Members take LLC Distributions?

It’s important not to distribute too much profit to the owners. Business expenses should be paid first and money should be set aside for taxes. After that, the Members can take some or all of the remaining profit.

How much profit gets distributed to each Member is determined by how much of the LLC each person owns (their “Membership Interest”). This is called a “proportionate distribution”.

Single-Member LLC example:
Ashwini owns 100% of her Single-Member LLC and she wants to distribute $1,000 of profit. Because she owns 100%, Ashwini receives $1,000. So Ashwini transfers the $1,000 from her business bank account to her personal bank account.

Multi-Member LLC example:
Dev and Albert each own 50% of their Multi-Member LLC and they want to distribute $1,000 of profit. Because Dev and Albert each own 50%, they each receive a $500 Distribution. Dev writes two checks from the LLC bank account. One for $500 payable to Albert, and another for $500 payable to himself.

Notes: The rules about proportionate distributions come from Federal Law (Regulation Q). An LLC Operating Agreement can also provide for non-proportionate distributions. This is rare. If you want to do this, you should consult a business attorney for a customized Operating Agreement. You should also tell your accountant since this affects tax calculations.

Multi-Member LLCs must make Distributions to all Members

If a Member in a Multi-Member LLC wants to take a Distribution, then all Members must take a Distribution.

Keep in mind that Distributions are proportional to how much of the LLC each Member owns.

How does a proportionate Distribution work?

LLC Distributions

Maka, Hiroto, and Tsubaki own Soulful Cinnamon LLC, a Multi-Member LLC. Maka owns 35% of Soulful Cinnamon LLC, Hiroto owns 25%, and Tsubaki owns 40%.

Hiroto wants to make sure he gets $2,500 in the next Distribution so he can put a down payment on a car.

Hiroto calls a meeting of the LLC Members and asks them to vote on a total Distribution of $10,000. So they all get on a group video call, and review the LLC bank account. Since there’s about $32,400 in the LLC’s bank account, everyone agrees to the Distribution.

Maka then receives a $3,500 Distribution, Hiroto receives $2,500, and Tsubaki receives $4,000. That leaves more than $20,000 in Soulful Cinnamon LLC’s bank account, which is more than enough to pay their expenses.

Your LLC Operating Agreement sets Distribution rules

The LLC Operating Agreement controls how and when LLC Distributions are made.

Typically, the Operating Agreement provides that LLC Distributions are made when the Members or Managers decide to make a Distribution. Members or Managers “decide” this by voting at a meeting.

Tip: A meeting can be a simple phone call, group text message, or email with all the LLC Members or Managers.

Related article: Member-managed vs. Manager-managed LLC

The LLC Operating Agreement template we provide at LLC University allows you to specify how many Members must vote to make an LLC Distribution.

For example, you could require a simple majority (like 3 Members for an LLC with 5 Members), or a unanimous vote (both members of a 2 Member LLC).

Keeping track of LLC Distributions

Make sure you keep a record of each Distribution. For example, make a copy of the check or save a printout of the wire transfer. Alternatively, you can review your bank statements and identify the Distribution(s).

Your accountant will need this information at tax time.

If you have a Multi-Member LLC, there should be a separate record for each Member’s Distributions.

How do LLC Distributions affect my taxes?

LLC Distributions aren’t taxed. Instead, LLC profit is taxed.

Because you owe taxes on the LLC’s profit, you don’t have to pay taxes again when you distribute that profit. Keep in mind, Distributions are derived from the LLC’s profit.

Said another way, tax is owed regardless of whether money is kept in the LLC bank account or distributed to the Members.

Single-Member LLC example:
Janine owns 100% of her Single-Member LLC. Her LLC made $9,000 in profit this year. Janine took a total of $4,000 in LLC Distributions. Janine will be taxed on the $9,000 profit. She doesn’t also pay taxes on the $4,000 of Distributions (because that comes from the $9,000 in profit).

Multi-Member LLC example:
Wayne and Darryl each own 50% of a Multi-Member LLC. Their LLC made $2,000 in profit. Wayne took a $700 Distribution and Darryl also took a $700 Distribution.

Wayne will be taxed on $1,000, which is his 50% share of the total profit. He doesn’t also pay taxes on his $700 Distribution (because that comes from his $1,000 share of the profit).

Likewise, Darryl will be taxed on $1,000, which is his 50% share of the total profit. Darryl doesn’t also pay taxes on his $700 Distribution (because that comes out of his $1,000 share of the profit).

Remember, Wayne and Darryl owe tax on that profit regardless of how much or how little they take in distributions.

Do I need an accountant?

The short answer is Yes. We strongly recommend hiring an accountant to help with your taxes. And we suggest you hire a bookkeeper if your business has a large volume of transactions, or has employees.

There are lots of other issues connected to LLC Distributions, especially at tax time, that only a qualified accountant can help you address.

You can also talk to an accountant about these more sophisticated distribution set-ups that we don’t discuss here:

  • Preferred Membership Interest. This means if you make a larger Capital Contribution – not proportionate to your Membership Interest – you will get money distributed to you before the LLC distributes money to the other Members on a proportionate basis.
  • Guaranteed Payments. This is a type of Operating Agreement provision that requires the LLC to pay the Members on a set schedule. Unlike LLC Distributions, Guaranteed Payments are taxed as income for the Members.

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References

Uniform LLC Act, Sections 404-405 – Distribution Rules and Insolvency Test
Regulation Q: Section 501 – Proportionate Distributions

Matt Horwitz


Matt Horwitz
Founder & Educator, LLC University®
Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.

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