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If I start an LLC with a partner and he puts in 75% of initial

capital and I put in...
If I start an LLC with a partner and he puts in 75% of initial capital and I put in 25%, is it possible to pay back those percentages with early earnings and then pay out subsequently at 50/50? Or does everything have to be 50/50 from the beginning or 75/25 forever?
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Answered in 9 minutes by:
9/27/2013
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Megan C :

Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.

Megan C :

How are you today?

Megan C :

You aren't going to be "stuck" at 75/25 or 50/50 forever. You can amend your LLC paperwork to change up your profit and loss share percentages, as needed.

Customer:

I am great, how are you?

Megan C :

But I do have a suggestion. Why don't you and your partner contribute equal amounts, but then you give the other 50% as a loan

Megan C :

So, you would get your $50,000 paid back directly from the company, without having to shift the profit share percentages

Customer:

How would that work, the loan?

Megan C :

You document the loan, you state an interest rate, then the LLC pays you back, plus interest

Megan C :

Just like you would any other creditor. You don't have to make payments right away...but you should make interest payments at least to keep it like an arms length transaction.

Customer:

So if I put in 75000 and he puts in 25000, we could get paid back for 25000 equally and then I could just get payments out of the LLC for the other 50000 until I'm paid back. That would come out as an expense so we could still get equal shares of profits after that comes out?

Megan C :

The payment itself is not an expense - the interest is, though

Megan C :

When you pay back principal on a loan, that's not an expense unfortunately

Customer:

Ok. we were just told that an issue would arise if we didn't take out equal amounts on a draw because of taxes, but we want to be fair and recoup our initial investments.

Megan C :

Your profit/loss sharing also does not have to match your capital contribution

Megan C :

You can stipulate that the split is 50/50 or 75/25 - it's up to you

Megan C :

If nothing is specified, then the split is 50/50

Megan C :

But you would be taking equal draws as profits, but you would be getting more because you would be paid back for the loan, which will be documented.

Customer:

Oh ok. so aslong as their is documentation of why the draws are different then we will be fine?

Megan C :

You will need a good business attorney to draft up the operating agreement. The operating agreement will stipulate what the ownership percentages are and what the profit sharing percentages are

Megan C :

And you can amend that operating agreement in the future, if you want

Megan C :

A great article on the operating agreement can be found, HERE

Megan C :

You're looking for the subheader "overriding state defaults"

Megan C :

There's a paragraph that lines out what you've been told - in many states, the owners must take equal draws regardless of capital contributions. A well drafted operating agreement will get around that.

Customer:

So it should essentially state that we are 50/50 partners in profit, but a 50000 dollar loan is being paid to X member so draws will be different until loan is repaid? (insert a bunch of legal jargon).

Megan C :

You wouldn't document the loan in the operating agreement

Megan C :

If you wanted to have a 75/25 split in profit sharing for a while, you would stipulate that in the operating agreement

Megan C :

You don't have to do the loan, it was just a suggestion

Customer:

You have been most helpful.

Megan C :

More on your capital accounts and how loans impact it can be found, HERE

Megan C :

My advice to you, would be to find a good business attorney and have them draw up your LLC paperwork. You could most definitely do it yourself, but the lawyer is well worth the extra $$

Customer:

I think you are right, an attorney would definitely be worth the money for us.

Megan C :

Especially if you are doing unequal shares. You want to make sure you properly override the state defaults on that.

Megan C :

I gave you a couple good articles to look over.

Customer:

I have them saved and will definitely take a look at them. Thank you so much for your help. have a great day.

Megan C :

You too. Please take a moment to rate my response

Megan C :

as excellent so that I may receive credit for assisting you today

Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Thanks, Josh for your positive rating. Please come back and visit me any time you have a question that needs answered. It was a real pleasure working with you today.
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Megan C
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
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Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

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