LLC related definitions


Membership interest: The percentage share that a member owns in the LLC. Also called ownership interest or capital interest.

Tax basis: The basis that the membership interest was set when becoming a member. If the membership interest is sold then the capital gains are calculated by the sale price of the membership interest minus the basis of that membership interest

Profits-only interest: When a member only gets a share of the profits (and not share of the ownership/assets) in return for promised future services. There are no taxes on this interest unlike a membership interest. The profits-only interest payments stops after the company is sold.

Distributive Share: This is the share of the profit and losses allocated to each member. It's sometimes called a "profits interest" in the LLC. The distributive share is usually specified in the operating agreement. Usually this is in the same ratios as the capital interest ratios between members

Operating Agreement: It's a legal document that outlines the ownership and member duties of the LLC. It allows you to set out the financial and working relations among members and between members and managers

Articles of Organization: It's just the form for the registration of the LLC

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  • about 3 years ago by vince