How Often Can an LLC Make Disbursements?

Pile of cash
••• Jupiterimages/ Images

As an owner of a for-profit company, you likely created your limited liability company to produce sales and earn a profit that brings you income. LLCs that ultimately sell to another buyer can realize value through a higher sales price brought about through profit retention, which increases company value. However, most company owners derive value through owner withdrawals. These disbursements can occur as frequently or infrequently as your LLC’s profit, cash position and agreements allow.

Member Disbursements

Member withdrawals are the distributions your LLC makes to its members out of its retained earnings. These disbursements are for the members' personal use. Your LLC makes the actual payments from its cash annually, quarterly or more frequently. The frequency of disbursements depends on what you and other members agreed upon in the operating agreement. If your LLC has no operating agreement or if another written policy on withdrawals and disbursements does not exist, then the members must discuss and agree on every disbursement that occurs.

Operating Agreement

In the operating agreement of multimember LLCs, you can specify the conditions necessary to disburse profits to members; these conditions include profitability levels, cash levels and frequency. You can also specify that the LLC retain all its profits, which may be an option to consider if a member with a large ownership stake is being sued. For your LLC's disbursement policy to withstand legal challenge by a member's creditor, it must be written. In addition, a written disbursement policy reduces the need for regular negotiation regarding disbursements, thus decreasing the potential for arguments.

Multimember LLC

If you operate an LLC with more than one owner, you must adhere to the terms outlined in the operating agreement. In the event of an Internal Revenue Service audit or other scrutiny of your accounting records, you may need to provide documentation supporting the approval of your disbursements. This may be less of a concern if your LLC files its taxes as a partnership where all income is treated as fully distributed to the partners. However, if your LLC files as a corporation, all disbursements are treated as dividends. Be aware that too little money left in the company to pay creditors could create issues with your LLC’s creditors.

Single-Member LLC

If you operate a single-member LLC and file as a disregarded entity, which is essentially a sole proprietor, you can disburse funds as often as you deem fit because the profits are treated as pass-through income by the IRS. However, you must be careful to document all the disbursements and not commingle business and personal funds. Failure to document transfers appropriately could result in the loss of your LLC's asset protection shield. If your LLC files as a corporation, you must treat all disbursements as dividends. Frequent dividend disbursements may trigger an audit.

Related Articles