Can an LLC Have Distributions? LLC Distribution and Tax Implications

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  • An LLC can distribute losses and profits unequally among members. For example, a 1% member can take 90% of losses.

  • An LLC may distribute money even without profits.

  • LLC distributions have tax implications that accountants can explain, such as Preferred Membership Interest and Guaranteed Payments.

  • Profits are allocated as ownership percentage. With 75% ownership, 75% of profits are distributed.

  • Taxes: The IRS taxes LLCs as “pass-through” so income passes to members’ tax returns.

  • Single-member LLC income is on Form 1040 Schedule C. Multi-member LLCs file Form 1065 and give each member a Form K-1.

  • Salaries come before distributions.

How to Distribute Profits in an LLC

A primary goal for most businesses is to generate profits and pay them out to the owners. LLC members usually receive returns through compensation (taking a salary), capital gains, or distributions. Members should include provisions in the LLC Operating Agreement that dictate the process for making distributions.

Distributions generally fall into two categories:
1.) Tax income/loss (deemed distributions): These are allocations of the company’s income, gains, losses, deductions, and credits provided to LLC members. Each member reports these distributions on their personal income tax return.
2.) Cash distributions: Distributions of cash or property from an LLC classified come from business profits.

Your allocated share of the profits gets added to your “capital account” in the LLC and is reported as income on your taxes.

LLC Draw vs Distribution

  • Preferred Membership Interest means larger capital members get money first.

  • Guaranteed Payments require scheduled member payments.

  • Profits are allocated by ownership percentage.

  • Members choose distribution frequency.

  • Taxes: The IRS taxes LLCs as “pass-through” so income passes to members’ tax returns.

  • Salaries preempt distributions.

  • Distributions differ from draws for taxes.

  • A draw and a distribution represent the same concept. The terminology varies based on the business structure to coincide with IRS tax laws.

  • Owner’s draws provide payment instead of salaries.

  • Draws must be filed as income on personal tax returns, depending on the business structure.

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