The members of a limited liability company are the owners of the business who receive a return on their investment in direct relation to the profits and losses the LLC generates. The LLC members may receive periodic distributions of business profits, but do not receive consistent compensation as an employee. Additionally, state laws do not require the LLC to compensate a member who provides services to the business on a regular basis.
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In the absence of an operating agreement that states otherwise, LLC members enjoy equal shares of profits the LLC earns through periodic distributions. To ensure that businesses do not make distributions in excess of retained earning amounts, many jurisdictions preclude the LLC from making a distribution that either renders it unable to pay ordinary business debts as they come due or causes liabilities to exceed assets. The managers of the LLC may rely on a financial statement it prepares that is based on generally accepted accounting principles in making a determination of whether the distribution violates state law. Once the LLC authorizes a distribution payment, any member who does not receive a distribution may hold the business liable in the same regard a third party creditor can.
When an LLC dissolves and winds up the business, all outstanding debts must be paid and remaining assets distributed to members. Creditors receive first priority in all remaining assets and earnings. Once all debts are satisfied, current and past members must receive any unpaid distribution. Remaining assets are given to members in amounts equal to prior contributions to the LLC. All remaining assets are distributed to members as a profit distribution. These profit distributions are made in accordance with the provisions of the operating agreement, otherwise, in equal shares.
Transferring Membership Interest
Unless the LLC operating agreement states otherwise, a member may sell her interest in the LLC to a third party. However, the transferee of the membership interest only obtains a financial interest in the business and does not have the same right as members to participate in the LLC’s management. The financial interest entitles the transferee to any profit and asset distributions the transferring member is entitled to. The transferring member does not dissociate as a result of the transfer. The member still retains rights to participate in the management of the business. However, dissociation occurs at the time of transfer, the transferee does not become a member.
Member Information Rights
In LLCs where the members are solely responsible for running the business, members have the right to access all information relevant to the business operations. Provided the member gives reasonable notice, he can inspect and copy any record during normal business hours. This includes all financial records, details of transactions and contracts. The LLC must voluntarily provide any and all material information affecting the LLC’s financial position and business operations. The duty to provide an owner with relevant information applies to each member who has knowledge of the material information.
References & Resources
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, Ph.D.; 2010