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Irwin Law
Irwin Law, Lawyer
Category: Real Estate Law
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Experience:  Lawyer- Broker 30+years - foreclosure, short sale, liens, title attorney.
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We have an LLC that will be dissolved once we sell a property

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We have an LLC that will be dissolved once we sell a property we flipped. There is an issue with the operating agreement that lends to some ambiguity. I would like to put forth a resolution to solve this issue so we can move forward with distribution of funds once the property is sold and we can dissolve the LLC.
Here are the details: 4 members each with 25% interest. However, only 3 of us (the funding members) provided $5K each in hard cash and we 'valued' the work of our service member at $5K so he got a 25% interest. However, the project got into trouble and all 3 funding members 'loaned' the LLC an additional $6K each to keep it from folding. The house is in escrow. Per a clause in our operating agreement, it states that any member can lend the LLC funds and those funds will be refunded (plus interest) when the LLC dissolves. The service member (who did NOT put in any additional funds - nor did he perform any added services) insists that the monies were capital contributions! This would mean he would get the advantage over the funding members as he would retain his 25% though he did not offer up any additional capital. The op agreement does not deal with how increased capital contributions should be handled. I would like to put forth a resolution stating that if our additional monies are considered 'Capital" and not loans, that we should adjust the % interest to reflect our increased contribution. This would appropriately reduce the Service Member's interest and increase the funding members interest. Is this reasonable, and if so what wording should I sue?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Irwin Law replied 1 year ago.

Capital contributions vs. Member Loans. The only difference in your situation would be if the LLC were to be insolvent. If the additional money are loans, then those members stand as creditors and share in any pro-rata distributions upon dissolution. As capital contributions though, their money is at 100% risk. If the LLC's property will bring enough to pay all debts, then whether the money is a loan or capital contribution becomes moot. The money will be in their capital accounts and will come back to them upon dissolution. In short, the non contributing member doesn't simply pick up a 25% share of the additional capital. It goes back to those who paid it in. Make sense? Your LLC operating agreement should cover all of this.

I hope that this information is helpful. Please click on a smiley face so that I will be compensated for assisting you. If you have a follow up question please send me back a Reply without entering any rating. Also, be sure to verify this information with a local attorney who is familiar with your local laws and procedures. Thanks again for using Pearl.Com- Just Answer. Your business is appreciated.

Customer: replied 1 year ago.

The project made a loss - but we are able to pay bills. The remaining money does not cover our capital investment. So, as the OP AG states that he gets 25% he will get 25% of what is left over, even though he did not contribute any money. This would mean the funding members are increasing the size of their losses to fund his gain! Which is why I wanted to make sure his % interest is diluted proportionately to our losses. (However, the OP AG does state that if it is a loan, the loan will be repaid prior to any other distributions.)

Expert:  Irwin Law replied 1 year ago.

A CPA should be able to interpret the agreement. My offhand (without legal research) opinion would be that the law would say they are loans because they were not contributed equally by all partners. Anything else would favor the non financial contributor and would not be equitable to all partners. A partner would have to be an idiot to advance more capital under that interpretation.

I hope that this information is helpful. Please click on a smiley face so that I will be compensated for assisting you. If you have a follow up question please send me back a Reply without entering any rating. Also, be sure to verify this information with a local attorney who is familiar with your local laws and procedures. Thanks again for using Pearl.Com- Just Answer. Your business is appreciated.

Irwin Law, Lawyer
Category: Real Estate Law
Satisfied Customers: 4694
Experience: Lawyer- Broker 30+years - foreclosure, short sale, liens, title attorney.
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