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Distributions

Great — let’s refine this with your expanded scenario: 15–20 members in a multi‑member LLC, $40k revenue, $25k expenses, leaving $15k net profit. At this scale, the challenge is balancing distributions now with planning for wages later as the business grows. Here’s how to think about it:

💰 Step 1: Understand What’s Available​

  • Revenue: $40,000
  • Expenses: $25,000
  • Net Profit: $15,000

This $15k is what flows through to members under pass‑through taxation. The LLC itself doesn’t pay federal income tax — members do, based on their share.

📊 Step 2: Allocation of Distributions​

With 15–20 members, $15k is a small pool. You’ll want to:

  • Define ownership percentages in the Operating Agreement (equal or based on contribution).
  • Issue K‑1s to each member for their share of profit.
  • Consider reinvestment vs. distribution:
    • Distribute a portion (say 50%) to reward members.
    • Retain the rest (50%) to build reserves for growth, wages, or future expenses.

Example:

  • $7,500 distributed among members.
  • $7,500 retained in the LLC for operating cushion and future payroll.

⏳ Step 3: Milestones Toward Wages​

At this stage, wages (W‑2 salaries) are premature because:

  • Payroll requires withholding, employer taxes, and compliance costs.
  • With only $15k net, wages would eat the entire profit.

Instead, set milestones:

  1. Profit Thresholds

    • Example: Once net profit consistently exceeds $100k ARR, consider converting some member compensation into wages.
    • This allows you to elect S‑corp taxation to reduce self‑employment tax.

  2. Cash Reserve Goals

    • Build 3–6 months of operating expenses before committing to payroll.

  3. Growth Metrics

    • Tie wage introduction to stable revenue per member (e.g., $10k/member/year).
    • Or to team performance milestones (product launch, customer acquisition targets).

⚖️ Step 4: Tax & Compliance Planning​

  • Current stage: Members are taxed on their share of $15k profit, regardless of whether it’s distributed.
  • Future stage: Wages require payroll systems, withholding, and employer contributions.
  • Transition strategy:
    • Keep using distributions now.
    • Plan to shift to wages once profits justify the overhead.
    • Consider S‑corp election when wages become viable — it allows splitting compensation into salary + distributions, lowering self‑employment tax.

📌 Practical Framework for You​

  • Now:
    • Allocate profits via K‑1s.
    • Distribute a modest portion, retain the rest.
  • Next 12–24 months:
    • Track ARR growth and net profit margins.
    • Build reserves.
    • Define clear performance milestones for when wages kick in.
  • Future (> $100k ARR):
    • Introduce wages for core contributors.
    • Elect S‑corp status to optimize taxes.
    • Keep profit interest pool for new members/employees.

✅ In short: With $15k net profit and 15–20 members, focus on modest distributions plus reinvestment. Wages aren’t practical yet — set milestones tied to profit thresholds and reserves before introducing payroll. This keeps compliance simple now while laying the groundwork for sustainable compensation later.

Would you like me to model a sample distribution plan (e.g., equal vs. performance‑based allocation) so you can see how $15k would actually break down among 15–20 members today?