With an LLC, do member distributions have to be commensurate with percentage of ownership?

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With an LLC, do member distributions have to be commensurate with percentage of ownership?

Asked on January 23, 2012 under Business Law, New Jersey

Answers:

EMMANUEL SOCKS / Socks Law Associates, PLLC

Answered 9 years ago | Contributor

No, they do not have to be. Same as in partnerships. Assuming this is an LLC taxed as a partnership. Further assuming we are talking about operating distributions. There are several rules that come into play once distributions are not commensurate with ownership. Several limitations on deductibility of losses. These rules basically try to ensure that distributions follow the economics of the deal. There must be substantial economic effect to the structure of the distribution. Basis and at-risk limitations kick in. If an arangement does not have substantial economic effect, then it may be just put in place to shift income and avoid taxes. The IRS will disregard the distribution.

 

EMMANUEL SOCKS / Socks Law Associates, PLLC

Answered 9 years ago | Contributor

No, they do not have to be. Same as in partnerships. Assuming this is an LLC taxed as a partnership. Further assuming we are talking about operating distributions. There are several rules that come into play once distributions are not commensurate with ownership. Several limitations on deductibility of losses. These rules basically try to ensure that distributions follow the economics of the deal. There must be substantial economic effect to the structure of the distribution. Basis and at-risk limitations kick in. If an arangement does not have substantial economic effect, then it may be just put in place to shift income and avoid taxes. The IRS will disregard the distribution.

 


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