How to Take Distributions From an LLP

By Elizabeth Rayne

In a limited liability partnership, or LLP, the owners are entitled to take distributions from the company. A distribution is any transfer of money or property to a partner and does not include repayment for loans or payment to a partner as an employee. Instead, it is the disbursement of profits of the partnership. Distributions are generally determined by the partnership agreement or a vote by the partners and must be formally recorded and reported to the Internal Revenue Service.

Partnership Agreement

Although not legally required, every partnership should have a partnership agreement in place. The agreement will specify when and how income from the partnership may be distributed. For example, distributions may be determined by how much each partner contributes to the startup fund, an even ratio among all partners, or the distribution may take into consideration the amount of time each partner devotes to the LLP. The agreement may also specify how assets will be distributed if the LLP dissolves. Drafting an agreement at the time the partnership is formed will avoid conflict among the partners as the business grows.

Types of Distributions

There are three scenarios where a partner may take a distribution from the LLP. A partner may withdraw money in anticipation of the current year's earnings, or he can withdraw money from the current or previous year's earnings, if the funds are not needed for day-to-day operations. The partners will vote on the timing of distributions and how the income should be divided, if these issues are not spelled out in the partnership agreement. A third form of distribution involves assets that are distributed to partners upon dissolution of the partnership.

Ready to start your LLC? Start an LLC Online Now

Record Keeping

All LLPs must maintain financial records. The records will show how much each partner contributed to the startup money for the business and how profits have been distributed. The LLP should maintain a financial record for the partnership as a whole as well as capital accounts for each partner showing individual contributions and distributions.

Taxes

LLPs do not have to pay business income tax to the IRS; instead, partners must report income from distributions on their personal income tax returns. If distributions exceed the money a partner originally paid into the business, he may be liable for additional taxes on the capital gain. The business will generally file a partnership return with the IRS, listing distributions made to each partner during the year. Schedule K-1 must be distributed to each partner showing his share of the LLP's income, deductions and credits for his personal records.

Ready to start your LLC? Start an LLC Online Now
Partnership Profit-Sharing Agreements

References

Related articles

Details of a Partnership Agreement

Although state laws do not require partnership agreements, a partnership agreement can provide a solid legal foundation for your business venture. Even among family and friends, a partnership agreement can provide benefits in the form of clarifying rights, relationships, and responsibilities related to the business venture. Without a partnership agreement, unnecessary disputes will certainly arise as the business operates over time. Friends may turn into enemies over issues that were supposedly decided in a handshake agreement, but were never spelled out in writing. The details of a partnership agreement help avoid conflict by establishing all the important aspects of the business in a written document to which all partners agree.

General Partnership Laws & Regulations

A partnership is a form of business entity owned by more than one partner. The key consideration is that the business is conducted with the aim of making a profit. Most partners enter into a formal written partnership agreement, setting out their rights and obligations, but a partnership can operate effectively on the basis of a handshake. Each state has its own laws relating to partnerships but the general principles remain the same across the United States.

What Are Two Main Advantages That a Corporation Has Over a Proprietorship and a Partnership?

C corporations -- corporations that have not elected to be taxed under Subchapter S of the Internal Revenue Code -- enjoy two main advantages over partnerships and sole proprietorships: limited liability and corporate taxation. Limited liability is the main reason that most businesses choose to incorporate. However, the IRS treats corporations differently from partnerships and sole proprietorships for the purposes of both income tax and self-employment tax, often resulting in a net tax savings for shareholders.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Liquidate a General Partnership

When a general partnership closes its doors for business, it must liquidate the partnership. Liquidation is a process ...

Steps for Dissolving a Partnership in South Carolina

Knowing the process for ending a general partnership can help partners effectively wrap up business affairs when it ...

Can a Partner in an LLC Receive a Salary?

Under the federal tax code, an LLC with more than one member is taxed as a partnership, though the individual owners of ...

South Carolina LLP Laws

South Carolina law regulates how a Limited Liability Partnership, or LLP, may form, operate, and ultimately dissolve. ...

Browse by category
Ready to Begin? GET STARTED