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Richard, Attorney
Category: Business Law
Satisfied Customers: 55598
Experience:  32 years of experience practicing law and a businessman.
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I have an LLC that is currently owned as follows per the operating

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I have an LLC that is currently owned as follows per the operating agreement:

Member 1: 34%
Member 2: 55%
Member 3: 5.5%
Member 4: 5.5%

These are also the profit and loss sharing ratios.

Member 1 wants to make an additional capital contribution. Will that cause these percentages to change? If so, is there a way to have 1 member make a cap. contribution without changing the ownership, profit, and loss percentages?
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning and thanks so much for asking for me. There would not be a need to necessarily change ownership percentage interests, but if Member 1 makes an additional contribution, then the profit and loss allocations would possibly need to be changed so that in the end the capital accounts zero out. Otherwise, at the end of the LLC's life, Member 1 will have a positive capital account and the other Members will have negative capital accounts. Allocations of losses along the way must have substantial economic effect under Section 704 of the Internal Revenue Code...that means that whoever gets allocated a loss must, if the LLC were to end, would be the one to suffer that loss. So, if the allocation of a loss would cause a member to have a negative capital account while Member 1 has a positive capital account, the loss creating the negative account would not have economic effect because that member is not the one that suffers that loss. Most LLC agreements, if properly drafted on the front end, have a "saving provision" in the allocation provisions to automatically take car of this...if yours does, then nothing would need to be done; if not, you would want to make that change. Alternatively, you can avoid the entire issue by treating the additional amount coming from Member 1 as a loan rather than a contribution...this would not then impact capital accounts and would require no change in the ownership and/or profit and loss allocations.

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Customer: replied 4 years ago.

did you receive my follow up question?

Thanks so much for checking back! I did not...would you mind re-posting it. Thanks for your patience and I apologize for any inconvenience.
Customer: replied 4 years ago.

I was asking if you could expand on the "saving provision" mentioned in your original answer? Our LLC is highly profitable and will not be dissolving anytime in the foreseeable future. So therefore, I want to make sure if member 1 makes this additional cap. contribution and we keep the allocation percentages the same, that our operating agreement has the correct language to make this ok to do. problem. The provision would look like this:

Notwithstanding any contrary provision of this Agreement, no allocation of net losses shall be made to a member to the extent such allocation would cause or increase an adjusted capital account deficit with respect to such member as of the end of any Company taxable year if any other member's adjust capital account balance is positive. If and to the extent an allocation of net losses is not made to a member by reason of the preceding sentence, then such net losses shall be allocated to those members with positive capital account balances to the extent of and among them in the ratio of such positive capital account balances.
Customer: replied 4 years ago.

So if I am understanding correctly, putting that provision in our operating agreement makes it ok for the capital accounts to not balance (zero out upon dissolution) because the negative ones will be offset by the positive (member 1); and as long as we have this provision and our allocation percentages are in accordance with IRC 704, then we are good to go for making the additional cap contribution and not having to update allocation percentages in the operating agreement?

Yes, one other provision you will want to add to insure no issues from the IRS is in your dissolution and winding up provision, provide that the LLC pays all the bills and distributes any remaining money to the members pursuant to the agreement, if those distributions cause any member to have a negative balance (which by definition means that another member or member(s) has a positive capital account, then a special gross income allocation shall be made to the member with the negative capital account and a special gross loss allocation shall be made to the member(s) with the positive capital account in the amount of the respective negative and positive capital account balances. That will be all you need. :)
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