Philip and Deborah form an LLC . Philip contributes $50,000 capital, and Deborah contributes $75,000 capital. They do not have an agreement as to how profits are to be shared. If the LLC makes a $100,000 profit in its first year, how will the profit be divided among the members?

Question

Quizplus · Accepted Answer

Since there is no agreement as to how profits are to be shared, it defaults to being divided based on the ratio of their capital contributions. In this case, Philip contributed 40% of the total capital ($50,000/$125,000) and Deborah contributed 60% of the total capital ($75,000/$125,000). Therefore, they would split the profits accordingly: Philip would get 40% of the $100,000 profit, which is $40,000, and Deborah would get 60% of the $100,000 profit, which is $60,000. This means Philip would get a total of $90,000 ($50,000 initial contribution + $40,000 profit) and Deborah would get a total of $135,000 ($75,000 initial contribution + $60,000 profit). Their initial capital contributions are not returned as a part of profit distribution.

Philip and Deborah Form an LLC