USA Balance out unequal cash distributions

[FrankT.]

Hi,

In an LLC with 2 members on a 60/40 ownership/profit split, member 1 (60%) takes 10000 in cash distributions over the past few years whereas member 2 (40%) only takes 5000. Now the LLC is about to be dissolved and it has 100,000 in the bank to be distributed. What is the proper way to balance past year's distributions so that no member takes more than what he's supposed to get? Thanks.

 

[MoralesTax]

Hi Frank,

This is where having a proper set of books for the business is advantageous. How the LLC is taxed (either as a partnership, S or C corporation) will determine how the cash distributions should be treated on the tax return. Ideally, both the financials and tax returns should match (if the financials follow tax basis accounting) and provide you with the current capital account information. Then, a schedule reflecting each member's capital accounts needs to be drafted to properly allocate the required distributions.

Additionally, you should reference to an Operating Agreement, if one exists, as it will likely contain a more detailed plan for dissolution of the LLC.

 

[FrankT.]

Hi Frank,

This is where having a proper set of books for the business is advantageous. How the LLC is taxed (either as a partnership, S or C corporation) will determine how the cash distributions should be treated on the tax return. Ideally, both the financials and tax returns should match (if the financials follow tax basis accounting) and provide you with the current capital account information. Then, a schedule reflecting each member's capital accounts needs to be drafted to properly allocate the required distributions.

Additionally, you should reference to an Operating Agreement, if one exists, as it will likely contain a more detailed plan for dissolution of the LLC.

Thanks but that's not what i asked. I'm looking for a sample calculation based on the numbers i provided above.

 

[MoralesTax]

Thanks but that's not what i asked. I'm looking for a sample calculation based on the numbers i provided above.

60% Partner is owed $59,000. 40% Partner is owed $41,000 based purely on your numbers provided and without factoring how profits/losses were allocated between those "past few years".

 

[MoralesTax]

The calculation to arrive at those numbers is:

Take the full pot: $115,000 ($100,000 to be distributed, plus $15,000 of previous distributions)
Multiply that by the ownership percentages of 60/40, or $69,000 and $46,000, respectively.
Then subtract the previous distributions accordingly as paid of $10,000/$5,000, or $59,000 and $41,000, respectively.

 

[FrankT.]

Thank you. Much appreciated