I'm in the process of setting up an LLC for investment purposes and I wanted to know if there are any standards for prioritizing the distribution of profits? Is it usually set up so that the more you invest then that member would get priority in the profit distribution? Is there a standard structure for the managing member and other investors in the group? I would be the managing member but would not be the main investor in terms of financial contribution to the investment. Any insight would be so helpful. Thanks!
There is no standard... an LLC is very flexible in how it can be structured.
It boils down to whatever you and your partner's decide on payment structure.
It could be 50/50 down the board or 70/30 either way, whatever you and partner decide.
You could even take on a partner and offer them a preferred 12% return and split the remaining profits 50/50.
Literally whatever you and partner decide on.
You would want to draft up a rough letter of intent with all terms spelled out. Take this to a competent attorney to run through all of the "What IF?" scenarios to form up your final Operating agreement.
Good Examples of "What IF" scenarios:
What if you get hit by a bus? What happens to the business, how is it divided up or does it survive and go to your partner?
What happens if your partner gets hit by a bus?
What happens if you or partner end up in divorce?
What happens if you and partner can't come to an agreement on the direction of the company?
What are the roles and responsibilities of each partner? What if a partner acts outside of those roles and what are the remedies?
You see how this can get complicated and an attorney and CPA should be consulted for advice on liability and tax strategies.
Hope this helps.
The great thing about partnerships is that it is upto the partners to set the profit and loss ratio's.
Something to take into account is each person's specialty and skillset to the partnership.
If you have experience or a proven track record of delivering a return for investors - you can demand a higher profit percentage.
As Jeff suggested - Please have an Attorney look over the partnership agreement. Also have an exit plan written out in the partnership agreement.
@Jeff V. thanks for the advice. I'll make sure I include some of those things and will have my CPA take a look at it for sure. Much appreciated.
@Basit Siddiqi I appreciate your input. Exit strategy is an excellent idea to have in the operating agreement. Ill review it and make sure there is something in there for that. Thanks again!!
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing