USA Multi Member LLC with Negative Equity Accounts

[Marco Vargas Galvan]

Have a multi member LLC client. Four members; all money contributed by two of the members. The other two are working for sweat equity. But yet the two sweat equity partners are taking twice monthly draws against their (zero) equity, which is leaving them with (increasingly) negative equity accounts. The business is not currently profitable. The client suggests that their previous CPA advised them that this was the best way to handle this situation, via "guaranteed payments" to the sweat equity partners. My issue: this LLC is generating insufficient profits to support these (supposed) withdrawals of (non-existent) equity. Okay to allow to proceed, despite equity accounts going increasingly underwater? Any insight into this scenario would be much appreciated.

 

[kirby]

Better take a look at State law on this. Some do not allow this.