If you choose the LLC formation for your business one advantage that you will have is flexible profit distribution. This is a benefit in LLC formations because you can select how the profits are divided up among the members of the LLC. In a sole-proprietorship, obviously all of the profits will be passed onto the sole owner of the business. In a partnership, the profits are split evenly between the two partners. In a LLC, you can elect how the profits are going to be split among the members based on how much capital each person contributed.
In most LLC formations, the distribution of profits is split based on how much capital each member has contributed. For example, if member A contributes $5,000 and member B and C contribute $20,000 each it would not be fair to split the profits equally. In cases like this the members that contributed the most capital should get the higher percentage of profits, in this example, member B and C should get around 45% of the profits and member A should only get 10% because of how much each member contributed. The thing to keep in mind is that capital does not just have to be money members can contribute cash, hours worked, or even equipment.
Even though in most LLC formations the profits are split based on the amount of capital that each member contributes, it doesn’t have to be that way. You can decide to distribute the profits differently, but you will have to file some extra paperwork.
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