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Calculating LLC Distributions

Dominic  Fleming's Profile

I want to distribute excess cash to members. In each of the last 7 years our LLC was profitable and has distributed 40% of net income to each owner by ownership % as tax coverage. Now I have undistributed retained earnings for each shareholder for each year of operations per changing ownership shares for each shareholder due to stock sales and grants. How best to calculate each members share of the intended excess cash distribution? I would like to do a weighted average rather than LIFO or FIFO, but given the different % of net income for each member for each year this becomes complicated and unwieldy to calculate and track. Any thoughts? Thanks.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

What does the Member Agreement state the determination date is for distributions?

Failing that approach (it's silent), when were the other distributions made (date wise) (get membership agreement first).

Thusly in the former it's very easy - cut and dry. The latter is more work, but you have a Balance Sheet figure in which to use for your calculations.

Dominic Fleming
Title: Chief Financial Officer
Company: Bridge Partners
(Chief Financial Officer , Bridge Partners ) |

It is silent, and this is our first ever distribution that is not pre-defined tax-coverage, so no board resolution dictating method as yet for this FCF distribution.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Why not calculate it on a quarterly basis, using % of ownership and net income at quarter end.

Bill Jancosko
Title: Partner, CFO
Company: Timepiece Capital Inc.
(Partner, CFO, Timepiece Capital Inc.) |

These are good options. But since the LLC operating Agreement is silent on this, consider getting members to agree on a plan of distribution. Best to avoid having a dissident member post-distribution.

Dominic Fleming
Title: Chief Financial Officer
Company: Bridge Partners
(Chief Financial Officer , Bridge Partners ) |

Thanks All. My accountant is telling me to make the distribution on the basis of each member's capital account balance percentage. It seems to me that this would exaggerate the amount for newer members since they purchased shares at escalated values which impacts their capital account upward.

Would it make more sense to calculate each member's undistributed Net Income allocation as a percentage of the total and then distribute the excess cash on the basis of that weighted average? For example, Bob has $900K undistributed NI of a total of $3M undistributed for all members, so 30% for him. Therefore his distribution amount would equal 30% of the $1M in FCF to distribute, or $300K.

Thanks for any input.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

If you can find a way (easier said than done) to allocate/identify the undistributed retained earning/cash based on what year it was "earned" then you may have a simpler allocation based on that year's ownership mix/percentage. In essence, you are just going back in time and distributing what was supposed to be distributed during that year.

Kehinde Kolawole CPA CGMA
Title: President
Company: Kolak Business Group LLC
LinkedIn Profile
(President, Kolak Business Group LLC) |

The distribution should be based on balance in each member's capital account as of the time of distribution. Update their respective internal partner (member) basis first.

On the other hand, how did you have stock sales and stock grants for Limited Liability Company (LLC)? LLC has only membership interest.

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