Hi,
I am starting a two member LLC with my business partner. I've been working on drafting the Partnership Agreement (also called Operating Agreement) and the one area that has me a bit stuck is how to word the allocation of profits and losses section. We do not plan on having any employees in the near future and will be generating our revenue billing clients for consulting.
We'll both be buying in with the same 50% capital contribution and will each own 50% of the business. However, most guidelines seem to assume that earnings will be allocated on ownership %. Instead, I'd like to tie a large % of the income to how much was actually generated - an "eat what you kill" type approach. Basically we have a bill rate that we bill clients, and possibly a rate for internal stuff like accounting/taxes if one person starts doing it and then apportion out the earnings to each person based on what they contributed to the bottom line. Its less important when we are both working the same amount, but if one person wants to take on extra work while the the other takes a 4 week vacation in South America, it would be nice to structure it so that the person who is working harder reaps most of the benefit of doing so.
How can we word this in the agreement without running into trouble with the IRS? Can we also allocate expenses into 3 pools: his, mine, ours and apportion them appropriately? How can we be sure to maintain 50% ownership and avoid a scenario where someone owns a majority because accounting shenanigans suggest that their capital account is larger?
Thanks for any help/guidance on this!
I am starting a two member LLC with my business partner. I've been working on drafting the Partnership Agreement (also called Operating Agreement) and the one area that has me a bit stuck is how to word the allocation of profits and losses section. We do not plan on having any employees in the near future and will be generating our revenue billing clients for consulting.
We'll both be buying in with the same 50% capital contribution and will each own 50% of the business. However, most guidelines seem to assume that earnings will be allocated on ownership %. Instead, I'd like to tie a large % of the income to how much was actually generated - an "eat what you kill" type approach. Basically we have a bill rate that we bill clients, and possibly a rate for internal stuff like accounting/taxes if one person starts doing it and then apportion out the earnings to each person based on what they contributed to the bottom line. Its less important when we are both working the same amount, but if one person wants to take on extra work while the the other takes a 4 week vacation in South America, it would be nice to structure it so that the person who is working harder reaps most of the benefit of doing so.
How can we word this in the agreement without running into trouble with the IRS? Can we also allocate expenses into 3 pools: his, mine, ours and apportion them appropriately? How can we be sure to maintain 50% ownership and avoid a scenario where someone owns a majority because accounting shenanigans suggest that their capital account is larger?
Thanks for any help/guidance on this!
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