Ownership, Contributions and Distributions of Profit in an LLC Operating Agreement
The LLC Operating Agreement will have provisions stating what the LLC members have contributed upon formation of the LLC. Contributions can be in the form of money, property or services. While not a contribution per se, the Operating Agreement can also provide that the LLC members may have the right to grant loans to the LLC.
Read more about Capital Contributions in Funding the Company.
The LLC Operating Agreement further has to address the economic ownership rights of its LLC members. (Economic ownership rights are usually distinguished from the voting and management rights of the LLC members.)
There is equity ownership in the LLC which represents the LLC member’s right to share in what is left over of the company upon its dissolution or if it were to be sold as a whole to another person or entity.
Then there is the right to receive distributions of the LLC’s profits as it goes along and makes money. LLC members have a right to receive their share of profits, i.e. money left over from the revenues of the LLC’s business after expenses.
In the most common scenario, LLC members share equity ownership and profit distribution rights equally. For example, if A and B each own 50% of the LLC and nothing else is stated in the Operating Agreement, A and B would each have a right to 50% of the equity ownership and the profit distribution rights.
But it is the beauty of the LLC, that the Operating Agreement can provide otherwise. For example, if A contributed $50,000 to the starting capital of the LLC and B nothing, they could agree that they both own 50% of the equity ownership of the LLC, but that A will initially receive ALL the profit distributions of the LLC until he has received back his initial capital investment.
**This post is for informational purposes only. For actual legal advice contact a business lawyer, business attorney or business law firm**