Does an LLC Pay Dividends?

By Larissa Bodniowycz, J.D.

Does an LLC Pay Dividends?

By Larissa Bodniowycz, J.D.

A dividend is a payment made to a corporation's owners, called shareholders, from the corporation's profits. Limited liability companies (LLCs) do not pay dividends to their owners, called members in the case of an LLC. Instead, LLC members receive draws and distributions to achieve the same purpose as dividends.

Calculator and pen on paper with word "dividends" laid over

Terminology

"Dividend," "distribution," and "draw" are commonly confused terms that people sometimes use interchangeably. A dividend is a distribution of part of a corporation's income paid to the corporation's shareholders. Corporations determine dividend amounts on a per-share basis. Only corporations can pay dividends.

A distribution is a distribution of a proportionate amount of an LLC or partnership's profits to the LLC or partnership's owners. Owners report their proportionate share of earnings regardless of whether the LLC actually transfers funds to the owner.

A draw is a sum of money taken out of a business's income by the owner of a single-member LLC or sole proprietorship. The owner does not report the draw as income on their taxes, but they don't deduct it from the business's income, either.

When LLCs Pay Distributions

LLC distributions can be mandatory or permissive. An LLC's operating agreement might require the LLC to make distributions at regular intervals—usually quarterly. The operating agreement also dictates how to calculate the amount of distributions. (For help creating an operating agreement, you can consult an online legal services provider.)

An LLC can still make distributions, even if the LLC's operating agreement does not require them. In this situation, distributions generally go out at a time and in an amount agreed upon by all members.

Legal Limitations on Distributions

An LLC generally has the flexibility to determine how and in what amounts to make distributions to its members. However, there are some state law-imposed legal limitations. An LLC cannot make distributions that leave the LLC unable to pay its debts. This might mean the LLC must make a smaller distribution than it wants to, or if financial circumstances are particularly dire, no distribution at all.

If an LLC makes distributions in an amount in excess of the amount legally allowed, the member or manager responsible for the decision might be personally liable for the improper amount. This means that the member or manager would have to pay the LLC back for the amount improperly distributed from their personal assets.

When LLCs Make Draws

An owner of a single-member LLC can typically take a draw from the LLC's profits at will in almost any amount chosen. Single-member LLC owners often use draws as a substitute for a salary and make them in regular intervals.

Liability for Improper LLC Draws

Single-member LLC owners should not take draws that would leave the LLC without adequate operating funds. They should also avoid making constant draws from the LLC's profits. Doing so can make it appear as though the LLC owner treats the LLC as a personal asset rather than a separate business. If an LLC owner fails to maintain separation between the LLC and their personal assets, they can lose the limited liability protection provided by the LLC.

If you are uncertain about which type of withdrawal to make from your company's income, it is advisable to consult with a small business attorney who regularly deals with these types of issues.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.