Does an LLC Pay Dividends?

by Jeff Franco J.D./M.A./M.B.A.

When you create or join a limited liability company, you have a claim on all earnings and assets of the business. Limited liability company members do not receive dividend payments; only shareholders of a corporation receive earnings through dividends. However, members may receive distributions of profit from the LLC at the discretion of management or as required in an operating agreement.

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Distribution Rights

Most jurisdictions allow an LLC to retain its earnings rather than distribute them to members. Profit distributions may not hinder the LLC’s ability to meet debt obligations as they come due in the ordinary course of business. Additionally, a distribution is improper if immediately after its payment the LLC’s liabilities exceed its assets. Regardless of whether a distribution is made, members have a legal claim on all earnings. However, unless the operating agreement requires a distribution, members do not have a right to force a distribution unless there is unanimous agreement among all members.

Improper Distribution Liability

In the event a profit distribution is improper, the member or manager who authorizes the payment is solely liable to the LLC and other members for the amount that is improper. As a defense to personal liability, the distributing manager or member may rely on financial statements prepared in accordance with generally accepted accounting principles in concluding that a distribution will be proper. Additionally, the member who receives the improper distribution is jointly liable if he accepts the distribution knowing that is it improper.

Dissolution Distributions

If the LLC terminates its existence and ceases all business activity, the remaining members must receive a final distribution of earnings and assets once all other obligations are fully satisfied. At the time of dissolution, all remaining creditors of the LLC receive repayment priority followed by former and current members who are awaiting payment of a past distribution. Once all former creditors receive payment, members who have contributed money or property to the LLC receive a return of capital. All remaining funds of the LLC are subject to distribution to all current members in proportion to their membership interest.


The IRS treats all LLCs that have at least two members as a partnership for tax purposes. Partnership taxation principles require the income and deductions of the business to flow through to each member’s personal income tax return. The LLC is responsible for filing an informational tax return each year; however, members must receive a Schedule K-1 which reports their proportionate share of income tax items. The members must then report all K-1 amounts on the applicable IRS Form 1040. The members incur a tax liability when the LLC earns a profit, irrespective of whether it distributes or retains it. In contrast, corporation shareholders pay additional income tax only on dividends they receive during the tax year. If the corporation does not declare a dividend, shareholders do not incur a tax liability.