Also known as: distributions of profits · profit distribution · profit distributions · profit sharing
Written by attorneys · grounded in primary & secondary sources — see below
An allocation of a business entity's earnings to its owners or participants according to the governing agreement or default statutory rules. The allocation determines each recipient's share and the timing of any payment.
Decker Electronics earned substantial net income last quarter. Its board adopted a plan under which a portion of those earnings would fund annual bonuses for long-serving employees and officers. The plan credited each eligible participant with a share calculated from overall profits rather than individual performance. Payments were made directly from corporate funds without impairing capital.
Dominic Drake and Delilah Duran advanced funds to a struggling firm under an agreement that fixed each member's allowable draw and barred any other distribution of realized profits until the lenders approved. The firm later generated earnings but could not pay them out to the members. The lenders invoked the restriction to keep capital inside the business.
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Section 405(a) requires any distribution a partnership makes before dissolution and winding up to occur in equal shares among the partners unless a charging order or transfer under section 503 applies. The statutory command of equal shares governs pre-dissolution distributions regardless of any profit-sharing understanding the partners reached at formation.
Supporting sources
In most cases where dividends have been compelled, it has been shown that the directors willfully abused their discretion by withholding distributions because of an adverse interest, a wrongful purpose, or bad faith. A business corporation is organized and carried on primarily for the profit of the stockholders, and directors' discretion does not extend to the non-distribution of profits among stockholders in order to devote them to other purposes.
Supporting sources
As a default rule, in many states members receive distributions pro rata based on the contributions they have made to the LLC. ULLCA § 405 adopts the partnership approach, prescribing distribution in equal shares and explaining this as a simple default rule that assumes profits will be divided equally.
Supporting sources
…their interest in the firm. No loan by the firm to any member is permitted and the amount each may draw is fixed. No other distribution of profits is to be made. So that realized profits may be calculated the existing capital is stated to be $700,000, and profits are to be realized as promptly as good business practice will permit. In…