BACKGROUND
An LLC, taxed as a partnership, was started by 2 members. Member A contributes $400 and Member B contributes $600 to start the business ($1,000 total). Since Member A had the idea for the business, both partners agree that profit/loss allocations AND periodic member distributions of cash flow will be 50/50 (as opposed to 40/60 as the capital account balances would suggest). The operating agreement also notes that any liquidation distribution will be made in accordance with positive capital account balances pursuant to Treasury Regulation 1.704-l(b)(2)(ii)(b)(2).
After 1 month in business, the members determine that the $1,000 originally contributed was too much and only $800 was needed to fund their startup. They elect to immediately return the $200 of excess contributions that were made.
QUESTION
Should the $200 excess be returned i) on a 50/50 basis as a standard distribution or ii) with 60% of the excess amount going to Partner B in accordance with the capital account balances?
An LLC, taxed as a partnership, was started by 2 members. Member A contributes $400 and Member B contributes $600 to start the business ($1,000 total). Since Member A had the idea for the business, both partners agree that profit/loss allocations AND periodic member distributions of cash flow will be 50/50 (as opposed to 40/60 as the capital account balances would suggest). The operating agreement also notes that any liquidation distribution will be made in accordance with positive capital account balances pursuant to Treasury Regulation 1.704-l(b)(2)(ii)(b)(2).
After 1 month in business, the members determine that the $1,000 originally contributed was too much and only $800 was needed to fund their startup. They elect to immediately return the $200 of excess contributions that were made.
QUESTION
Should the $200 excess be returned i) on a 50/50 basis as a standard distribution or ii) with 60% of the excess amount going to Partner B in accordance with the capital account balances?
