The previous page described how profits and losses are allocated among Members, as well as the mechanism for distributing cash or other assets. This page will discuss strategies for compensating an LLC's Managers and Members.

By way of contrast, the officer/shareholders in a closely held corporation may distribute company profits to themselves in one of two ways. First, they may pay themselves salaries which reflect their relative contributions to the company. E.g. it is expected that the President of a corporation will perform more critical services, and will receive a higher salary than, a vice president.

Second, corporations may pay dividends on their stock. In this case, each share receives an identical amount, e.g. $1. Thus, a person who holds more shares receives a larger portion of the aggregate dividends, regardless of position or work performed.

Partnership accounting works to provide the same ultimate benefits, but through somewhat different accounting mechanisms and using different terminology.

*Note that an LLC may elect to be treated either as a corporation or a partnership for tax and accounting purposes. This discussion assumes that the LLC has chosen to be treated as a partnership.

Salary vs. Draw
In a corporation, an employee receives a salary, regardless of whether or not that employee is also a shareholder. In an LLC, Members are distributed "draws" against the year-end profits of the business. Draws are not automatically guaranteed in the way that salaries are: whereas a salary commits the corporation to pay $X each month, a draw is available only to the extent that profits are available, unless the LLC's members agree to guarantee the draw of one or more members (as in the example on the preceding page). It is common to make such provision for Members acting as the Managers of the LLC, and consequently dependent on the draw for their livelihoods.

Profit Distribution
Analogous to distribution of corporate dividends, an LLC may distribute profits to its Members. Generally, profits are distributed based on the relative percentage ownership of the Members, e.g. a 60% owner receives 60% of the profits. This is similar to the pro rata distribution of dividends among corporate shareholders. LLCs offer much greater flexibility in this regard, however. While a corporation would be required to provide separate classes or series of stock in order to pay differing dividend amounts, LLC Members may agree among themselves to distribute profits in any way they see fit. One common arrangement is to provide that a cash investor receive a preferred distribution until her initial investment is repaid (perhaps with interest). For example, a person investing $100,000 for a 50% interest in the LLC could receive 75% of profit distributions until she receives $150,000, and thereafter, she would receive 50% of distributions.

LLCs offer the ability to customize compensation and other terms to meet highly specific situations, and in that sense offer significant benefits over corporations in many situations. Our attorneys have extensive experience forming and advising LLCs to meet a wide variety of business objectives. Please contact one of our attorneys for consultation regarding LLC compensation strategies or other issues.

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