Corporations (C and S) do not have the ability to allocate distributions of available cash to the partners in any way that is contrary to their percentage interests (pro rata). It’s really simple for them which can be good or bad depending on your goals. On the other hand, partnerships are the opposite. They provide super flexibility when it comes to allocations of profits and losses to the partners as long as the agreement has substantial economic effect (i.e. actually following the agreement).
By way of example, a partnership agreement can state that the money partner (the investor) receives 100% (or any greater percentage really) of all available cash or profits until it receives its investment. The provision can further build in a preferred return for the investor as well. Ultimately, in practice you’ll find that the partners will share distributions in accordance with how they agree. Sometimes that’s by percentage interest (pro rata) and sometimes it’s not. This issue is an important one when raising capital and also choosing which entity to form. Sophisticated investors know this and you’re at a disadvantage if you do not. Again, there are legal and tax implications for forming each type of entity. Getting it right is important from the outset or you’ll pay for it later, literally.
Don’t forget to download our FREE:
Business planning stress test
Florida business entity comparison chart
Video Ads Mastermind business accelerator from the highly credentialed Tall Oak Consulting; helps businesses level up in a straight line, minimizing the painful process of learning and adjusting, to achieve founders’ particular goals.
99 Designs – economical design for your initial IP
Protect your family, assets and business, and gain the peace of mind of knowing you’re prepared and in control. You may feel apprehensive about estate planning, but it doesn’t have to be this way. We’ll help you achieve your estate planning goals and ensure you feel accomplished and confident. With our 4-step unique proven process, leaving a legacy you can be proud of is easier than you think. The alternative can mean significant taxes, court, costs, conflict (litigation) and a host of unpleasant and destructive surprises. Call us to get started today at 954-228-3369.
These videos neither constitute legal advice nor create an attorney-client relationship between you and Haimo Law. For more information, click here: https://haimolaw.com/legal-disclaimer/