LLCs electing S-corporation status must include a profit and loss allocation clause in their operating agreement that distributes income, gains, losses, deductions, and credits among members strictly in proportion to their ownership percentages, as governed by IRC Section 1366 subchapter S.
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The ONE Clause Your LLC S-Corp Operating Agreement MUST Have!Added:
Third, another clause you want to add to your LLC operating agreement for S corporation purposes is an allocation of profits and losses clause. This provision states that all items of income, gain, loss, deduction, and credit are allocated among the members strictly in proportion to their ownership percentage in the company. Try to reference IRC section 1366 subchapter S of the code as those are the code sections that specifically govern how S corporation income flows to shareholders. Speak with your accountant or your business attorney to help you draft this provision.
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