We run a small LLC in California, 50/50 partners. My partner just told me he needs to pull about $8k out of the business account for personal bills, saying he'll pay it back later. We have an operating agreement but it's pretty basic and doesn't say much about owner draws or distributions. I'm worried this messes up our cash flow and possibly our taxes. Has anyone dealt with this? Do I have to let him? What should I be doing right now?
Partnership
My California business partner wants to withdraw money for personal expenses
You need to look at the operating agreement first, but if it's silent on distributions and draws, then as 50/50 members you both have to agree on any money leaving the company for personal use. He can't just take it unilaterally without risking a breach of fiduciary duty.
What's your cash buffer like? If $8k breaks you, that's the more urgent issue. The tax part is also a mess if it's not documented as a distribution vs a loan.
Is he asking to withdraw it as a loan or a distribution? Those are treated very differently. A loan needs a promissory note and rspayment terms. A distribution reduces his capital account. Get it in writing either way.
He called it a 'draw' and said he'd pay it back, but there's no paperwork. Cash buffer is about $15k, so it wouldn't kill us but it would leave us thin for the next two months of rent and payroll.
California LLC law (Corp Code 17704) generally requires unanimous consent for acts outside Ordinary course, and member distributions usually need member approval per the operating agreement. This isn't legal advice but I'd treat it as a serious red flag. If he takes it anyway, you may need to consult a business attorney.
Also check your LLC's tax classification. If you're taxed as a partnership, a distribution isn't automatically taxable but it lowers his basis. If it's a disguised payment for services, that's different. An accountant should weigh in before he moves money.
Sounds like he's putting you in a bad spot. I'd say no until you both sign a written agreement on how draws work going forwadr. If he pushes back, that tells you a lot.
Not a lawyer, but wouldn't letting him take it without documentation set a precedent? Next time he may expect it. Also if the business can't pay its bills because of this, you could be personally exposed on some obligations depending on contracts.
Agree with BlueHeron77. A promissory note with a repayment schedule and interest (at least the applicable federal rate) would protect the business and the partnership. Otherwise the IRS could recharacterize it as a distribution or even income ngl.
I'm going to propose a written loan agreement with a 6-month repayment plan. He's not happy about it but I told him I need it for our records. We'll see how it goes
Make sure you both sign and keep a Copy with the LLC records. Also update the operating agreement afterward so this isn't a recurring fight.
If he refuses to sign, you might have to consider whether the partnership is still workable. California has dissociation rules but that's a last resort. Hopefully he comes around.
One more thing—if you do the loan, make sure the LLC charges and collects interest. Otherwise the IRS may impute interest anyway and it complicates your K-1s. Your CPA should be involved.