What Is a Disbursement From LLC?

US tax forms
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Each year at tax time, a limited-liability company must determine its profit or loss for the year and allocate that to its members according to the rules in the company's operating agreement. If you're a member of an LLC that makes a profit, the company doesn't necessarily have to pay you any money. However, even if you don't receive any money, you still might have to pay tax on your share of the profit. If you do receive cash or property from the company, it's considered a disbursement from the LLC.

LLC Disbursements

An LLC's operating agreement defines the percentages by which the company's profits are allocated to its members. A company might periodically pay its members their shares of the company's profit, called a disbursement, provided that the company has enough money to pay its bills. Or, members might agree to reinvest the profit in the business. Regardless of whether the company provides a disbursement to its members, the LLC must keep accurate records of the profit allocation to each member and adjust each member's account balance accordingly.

Improper Disbursements

In most states, an LLC must have enough money to pay its bills before it's permitted to make disbursements to members. If the manager or managing member decides to disburse profits when he knows it will cause the company to come up short, he's personally liable for the amount that should not have been disbursed. Any member who accepts a disbursement with the knowledge that the company won't have sufficient money to operate, shares the liability with the manager or managing member.

Taxing Disbursements

Each member must record the profit that the company allocates to him on his taxes the year it was earned, even if the member doesn't receive a distribution from the company. Losses that the company allocates to members are treated identically. The company must provide Schedule K-1 of Form 1065, Partner's Share of Income, Deductions, Credits, Etc., to each member of a multimember LLC. After you've paid tax on profits allocated to your account, you don't have to pay tax again when you withdraw the money.

Dissolution and Disbursements

If you and your partners decide to dissolve your LLC, the company must itemize and then distribute all of its assets. The company's creditors get paid first. If anything is left over, the company attempts to reconcile member accounts. It first pays prior distributions that haven't been paid and then pays capital contributions that members made to the business. Finally, if there's still excess money to be distributed, each member receives his share according to the operating agreement, and these excess amounts are reported to each member on Schedule K-1 and taxed accordingly.

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