Distributions: Overview, definition and example
What are distributions?
Distributions refer to the allocation of profits, dividends, or other assets by a company, partnership, or entity to its owners, shareholders, or members. These payments are typically made in proportion to ownership interests or as specified in the governing agreement, such as a partnership agreement, shareholder agreement, or operating agreement.
For example, in a partnership, profits may be distributed to partners at the end of the fiscal year based on their percentage of ownership.
Why are distributions important?
Distributions are important because they provide a mechanism for sharing the financial benefits of an entity among its stakeholders. Clearly defining how distributions are calculated, approved, and disbursed in agreements ensures fairness, transparency, and compliance with legal and financial obligations.
Including detailed provisions for distributions helps prevent disputes, protect stakeholder interests, and establish a clear process for managing profits or other assets.
Understanding distributions through an example
A limited liability company (LLC) with three members generates $100,000 in profits. The operating agreement specifies that distributions will be made quarterly and allocated based on ownership shares. Member A owns 50%, Member B owns 30%, and Member C owns 20%. Following the agreement, Member A receives $50,000, Member B receives $30,000, and Member C receives $20,000.
An example of a distributions clause
Here’s how a distributions clause might appear in an agreement:
“Distributions of net profits shall be made quarterly to the Members in proportion to their respective ownership interests. Distributions shall only be made after the Company has reserved sufficient funds to meet its operational and financial obligations. Any additional distributions shall require the unanimous consent of the Members.”
Conclusion
Distributions are a critical aspect of agreements involving shared ownership or investments, ensuring that profits or assets are fairly and transparently allocated. By clearly defining the terms and conditions for distributions, agreements reduce conflicts, promote trust among stakeholders, and support smooth financial operations. A well-drafted distributions clause is essential for managing shared financial interests effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.