Distribution (LLC)
Cash or property paid by the LLC to a member, typically out of profits or capital.
Definition
Distribution is the transfer of cash or property from the LLC to a member, in their capacity as member (not as employee or contractor). Distributions reduce the member's capital account. The Operating Agreement specifies when and how distributions are made: typically when the LLC has cash above operating reserves, in proportion to membership interests.
Context
Distributions are tax-free to the recipient member up to their capital-account basis; amounts above basis are taxable.
Example
A Delaware LLC has $100,000 cash above operating reserves. The Operating Agreement requires pro-rata distribution to members. Two members with 60/40 interests receive $60,000 and $40,000 respectively.
Common pitfalls
- Distributions to non-resident members may have US withholding implications under FIRPTA or other rules.
- Distributions in excess of capital account basis are taxable as gain.