A few questions about tax distributions for LLCs in the context of self funded search deals that use preferred equity:
1) In MM PE we set tax distributions to be according to the personal tax rate of the highest taxed member (let's say 45%) and then assumed distributions that were pro rata based on ownership percentage. Is that also market for $1-2mm EBITDA companies?
2) If you're raising preferred equity where the investor is putting up most of the capital, they're getting a preferred return plus a minority common stake,and you as the operator / searcher are getting majority of the common, are the tax distributions distributed based on common ownership?
3) I assume the tax distributions the investor gets counts toward the preferred return?
4) If you're doing tax distributions pro rata for common ownership based on the highest taxed member, are there lenders who veto this and push a different structure? This structure works in my experience in the MM and higher but not sure how SBA or small lenders think about it
Tax Distribution Questions
by a searcher
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1) Rather than setting it at the highest taxed member's rate (e.g., 45%), we set it at a "reasonably high" rate that everyone could get onboard with and left it subject to re-evaluation if necessary.
2) Talk to a CPA - I talked to several. Searcher will still end up with the lion's share of tax obligation and therefore tax distribution in most cases, but it should be adjusted down by the preferred return.
3) Deal-specific I've seen go both ways. Don't have nearly enough datapoints to know what's most common. One way or another it needs to be explicitly dealt with in the operating agreement.
4) No idea what lenders expect or want to see in the space. Our tax distribution plan either didn't get much lender scrutiny, or it met their expectations.