Equity, Loans and Allocations


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In an LLC, distributions need not be related to ownership shares. However, our operating agreement states that positive distributions (gains) will be based upon ownership share.

Here is my question. If the company isn't yet making enough profit to provide any given level of "guaranteed" draw, and a minimum draw is required for one owner to make personal rent payments, how does this affect equity, if at all, for the remaining two partners that must sacrifice their distributions in order for the first partner to have enough to pay rent.

e.g. Is it okay for a long term liability to be issued to the other two partners - and IOU for the distribution that should have been paid given the amount paid to the first partner?

Is it more appropriate to decrease the first partner's equity based upon uneven distributions?

If Partner A owns 50%, B owns 25% and C owns 25%, and this month partner A gets $2,000, partner B gets $1,000 and partner c gets $0, how should this be fairly reflected?

Equity

asked Dec 29 '11 at 02:15
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User15253
1 point

3 Answers


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It is whatever seems fair to all parties involved. You can structure it however you want, but I would shy away from proposing equity transfer based upon needing a draw. That can cause bad blood very quickly. He gets a draw right now, make it an IOU to be paid in reduced distribution if/when you hit it big.

Reducing equity right now for that partner would quickly leave him with no equity. If you are not making any money yet, your business is not really worth anything. 25% of zero is still zero. :)

answered Sep 28 '12 at 14:46
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Need A Geek Indy
562 points

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A cleaner way to do this may be for the person receiving the 'draw' to borrow money from the company each month as a loan. (Note, I am not a lawyer nor am American, so I don't know for sure if LLCs can do this cleanly or not.)

Then when it comes time to make a distribution later on, the distribution can be used first to pay off any loans partners have taken.

Note that the classic draw is for a salesperson, where they borrow against their future commissions. This is the same concept: the partner is drawing against future distributions.

answered Aug 24 '13 at 04:22
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Kamal Hassan
1,285 points

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Whatever feels fair to all parties is fair game contractually. However you may want to read Forming a new software startup, how do I allocate ownership fairly? Disclaimer: I'm no lawyer, this is not legal advice, etc.

answered Jul 30 '12 at 13:54
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Anthony Ryan Lorraine
31 points

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