Q: Hi, this question is regarding member capital contributions vs profit distributions and what is profit? (In Oregon).
I'm in a new multi-member LLC with uneven ownership percentage but everyone contributes the same dollar amount per percentage, (ie 1%=$2k, 5%=$10k, etc). Almost 100% of the capital contributions will be for 1 private investment idea this year, not stock related. I know the membership operating agreement (which is not written) can dictate a lot of these items, but how do I know what is legal and morally just. Assuming our project makes money and we distribute the proceeds equal to ownership % as a pass through LLC, some members have indicated leaving the LLC after this project. How do we buy out those members if they decide to leave? Does the LLC need to and is it legal for an LLC to retain funds to buy back their percentage? Are their capital contributions a deduction from profits before profit distributions? I realize these are many questions and I'm willing to pay for accurate info, so are these legal or CPA questions? How do I find reasonable and timely professional help in my area?
A: You need an operating agreement to define these terms immediately. Without an agreement, you have no good way to resolve disputes, add or remove members, track profit shares, etc.
You need everyone to come together on this. Frankly you should not be investing money into any company where your rights to the money and profits are not clearly defined in a written document.
A: Your questions touch on both legal and financial (tax) issues, so the best people to fully answer your questions are (1) a business lawyer experienced in advising startups of this nature, particularly someone who is prepared to take on the securities implications of your question; and (2) a CPA. Working with them will help you identify a sound path forward. As to what feels fair under the circumstances, that's a business call that you'll have to make once you have all the facts in front of you.
As to buyouts, you have a lot of flexibility in how you want to handle this. Usually the buyout provision is spelled out in an operating agreement in advance, but it can also be included in other types of documents (sometimes styled as restricted unit grant or transfer agreements, or buy sell agreements, or perhaps even a subscription agreement). The LLC can, at times, buy the members out directly, or it can run as a right of first refusal that, for example, is first offered to the company and then to the other members. In these cases the operating agreement usually specifies the financing terms as well. Generally speaking, it's best to have the buyout plan in place before the first buyout occurs, when things are moving fast and, perhaps, emotions are running high.
The last thing I'll flag is that it sounds like the core concept behind your LLC may involve issuing securities. If that's so, you should know that it's a complicated and risky area of law, especially in Oregon. If you think this may apply to you, make sure you consult with an attorney who is prepared to advise you on the securities implications of your business.
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