Medford, OR asked in Business Formation and Business Law for Oregon

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?

2 Lawyer Answers

Daniel DiCicco

  • Portland, OR
  • Licensed in Oregon

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.

Ashley Demland

  • Tigard, OR
  • Licensed in Oregon

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.

Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.

The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.

Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.