I am the majority member of a 2-member LLC. Ownership is currently split 67/33. Over the past 3 years, we have not distributed any earnings or paid ourselves anything (except amounts to cover taxes) but have left all earnings in the company's capital account. I've allowed the other member to earn equity each year he has worked. At this point, we are putting in the same amount of hours each month, but the difference is that I have a full-time job and he does not. The LLC takes up time for him and prevents him from earning income from other jobs.
We are discussing ways to potentially distribute earnings to him beginning next year. Since we both put in the same amount of work, it doesn't seem fair to pay earnings to him but not myself. However, I'm not in need of the money and would rather leave the money in the company so it can continue to grow. What would be the most common way(s) to handle this?
Some possibilities we have discussed:
- Distribute earnings to him and not myself. To balance things out, his equity in the company would be decreased proportionally to the amount that is paid to him, depending on the company's valuation.
- Distribute equal earnings to both of us, but keep my portion within the company. I would be paid interest on this money by the LLC since I'm essentially "loaning" the money back to the company that would have been paid to me.
- Distribute earnings to him and not myself. These earnings would decrease his capital contribution amount and could potentially put it into the negative. From what I understand, if we ever sold the company, this difference between our capital contribution amounts (mine would be much more) would be deducted from his portion of the sale proceeds and given to me. Or, we could "settle up" at a future time when the company is generating more revenue by paying myself the amount he was paid up to that point.
- Distribute equal earnings to both of us in cash (not very ideal because it could hurt the company's capital and ability to continue doing business).