Member Distribution

What is a member distribution?

A member distribution is a payment from an LLC to its members representing their share of profits or a return of capital. Like partner draws, member distributions are not wages and are not subject to payroll withholding. For multi-member LLCs taxed as partnerships, distributions reduce member capital accounts. For single-member LLCs, distributions are similar to sole proprietor draws.

Distribution timing and amounts

Your operating agreement should specify how and when distributions are made. Many LLCs distribute profits quarterly or annually after determining available cash. Tax distributions are common, providing members enough cash to pay taxes on their share of LLC income even if profits are being retained. The operating agreement may require distributions to be proportional to ownership or allow other arrangements.

When distributions exceed basis

Members can receive distributions tax-free up to their basis in the LLC. Basis starts with your capital contribution and increases with your share of income. It decreases with distributions and your share of losses. Distributions exceeding basis are taxable, typically as capital gains. Track your basis carefully. Your accountant should maintain basis schedules showing how each year's activity affects your position.