How to Take Distributions From an LLP

By Bryan Driscoll, J.D.

How to Take Distributions From an LLP

By Bryan Driscoll, J.D.

A limited liability partnership (LLP) is just one of several types of corporate entities available to you and your business. Because many states prohibit licensed professionals from forming limited liability companies, LLPs are specifically for licensed professionals, such as lawyers. Distributions of partnership profits are wholly acceptable, provided that the distribution meets certain conditions.

Two businessmen reading paperwork together

Types of Distributions

A distribution is the disbursement of partnership profits, or any transfer of money or another asset to a partner that is not repayment for loans or payment to a partner as an employee.

Under an LLP, there are three types of distributions or profits allowed to be transferred to partners:

  1. Partners may accept distributions before the current year's earnings.
  2. Partners may accept distributions from the prior year's earnings.
  3. Partners may accept distributions upon the dissolution of the LLP.

These types of distributions are generally made in one of two ways:

  1. In accordance with the LLP's partnership agreement
  2. By a majority vote of the LLP's partners

Partnership Agreement Distributions

Many states do not require LLPs to have partnership agreements. However, it is good practice to have one as it can help you and your partners avoid conflict down the road. Drafting a partnership agreement when it forms also allows you and your partners to make determinations about how and when you can make partnership distributions and include them in the agreement as instructions for this process.

You can have distributions based on the amount of time each partner puts into the business, or you can have distributions occur equally at predetermined intervals. You can even determine how distribution of assets will occur if it dissolves.

Partnership Vote Distributions

Each partner has one equal vote. Even if partnership distributions are laid out in a partnership agreement, you can still vote to make additional distributions.

In order for an LLP to make a distribution by a vote of the partners, the members must hold a meeting where partners vote on whether to make a distribution. If a simple majority, or whatever majority you specified in the partnership agreement votes in favor of the distribution, then the distribution is made.

Taxes and Record Keeping

An LLP must formally record and report each distribution, regardless of how it is made, to the Internal Revenue Service (IRS). Because they are pass-through entities, meaning each partner bears the gains and losses of the business instead of the IRS taxing it as a business entity, a partnership return must be filed with the IRS listing the distributions made to each partner during the year.

The best way to stay in compliance with your distributions is to ensure that you keep meticulous records, especially financial. Your records should show when distributions were made, how they were decided upon, which partners received distributions, and how much each partner received. It is important to keep these records because, as a partner, you have to report them to the IRS on the partnership return and on your personal income tax return.

Not only will these records keep the partnership healthy, but they will also make it easier for each partner come tax time each year. Protecting yourself today can ensure that in the future you don't have to spend more money and time on the LLP distributions.

 

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.