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Discussion:LLC Agreement-Additional Contributions

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Discussion Forum Index --> Tax Questions --> LLC Agreement-Additional Contributions

Mark Eason (talk|edits) said:

5 January 2007
I am helping a client rewrite their LLC Agreement (Profit and Loss based on Capital intstead of Units. How do you calculate P/L %'s when some members have negative capital accounts and others have positive accounts?). The section on Additional Contributions is throwing me. The section reads, "Members who exist immediately prior to such issuance shall be provided written notice of this intent, and shall be offered in such notice the opportunity to make additional capital contributions in proportion to their respective interest." It is the calculation of the proportion that is confusing me. The agreement does not state the amount that the proportion is based upon (new capital, old capital, old and new capital, etc.).

What will help me is what does your clients' section on additional contributions or dilution of ownership say.

Thanks for the help.

FTF65 (talk|edits) said:

January 7, 2007
First things first: while I don't know the Virginia state laws regarding CPA's practicing law, I would suggest that you familiarize yourself with such laws so that you don't violate them.

That being said, here are some quick thoughts/comments:

  1. Depending upon what the business of the LLC is, you could define the percentage interests of the members as a percentage of capital contributions, not capital accounts (note: you might not want to do this if, for example, one of the partners contributes services in addition to cash). Some potential language for use: "Additional Capital Contributions may be called for by the Managing Partner by written demand upon the Partners from time to time for any purpose deemed appropriate by the Managing Partner in his reasonable discretion as long as such purpose is consistent with an Annual Business Plan approved by the Partners or is necessary and appropriate in connection with any matter approved by the Partners pursuant to this Agreement. Such additional Capital Contributions shall be payable in proportion to the Percentage Interests of the Partners";
  2. You should consider the need/desire to revalue the capital accounts in accordance with Reg. 1.704-1(b)(2)(iv)(f) immediately prior to any additional contributions;
  3. Since you are planning on allocating P&L in accordance with capital, I think the situation of some members having negative capital accounts while others have positive capital accounts is unlikely unless you have non-recourse debt financing and some (but not all) of the members are either lenders or guarantors and even then it depends upon how you allocate any non-recourse deductions (note: if this situation arises, a revaluation of the capital accounts may fix the problem).

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