One of our firm’s industry specializations is in the restaurant industry.  Here is a letter sent to a restaurateur client:

Dear restaurateur client:  Most restaurant investment LLC partnerships offer A and B shares. A shares are issued to investors who put the capital into the LLC Partnership.  B Shares are paid for the expertise of the restaurateurs and his or her management team as a motivational tool.

 Once A Share investors get their money back, B share investors (those management people who did not put any money in) begin to share in the distributions and profits.   I hope this document becomes our KEY document to explain how loss and FICA tip credit should be allocated when investors receive distributions, profit and loss and FICA tip credit.  This explanation should work for ALL of the LLCs.

 Partnerships, limited liability companies (LLCs) and S corporations are all what’s known as “pass-through” entitles. That means they are generally not taxed themselves, as C corporations are. Rather, their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss) even if that income is retained by the business and not distributed to the owners. You are  obligated to report on your tax return the amount attributed to you on Form K-1. Whether you received any payout is really irrelevant to the tax question.


1. Percentage of profit/loss and FICA Tip Credit allocated is based on capital contributed.

2. Once ALL of the (A shares) capital contributed is paid back (without interest), the allocation is changed to being based on ownership percentage (B shares become vested and B shares get their prorata percentage of profit or loss and FICA tip credit).

3. Example:

A.  John puts in $100K for 40% ownership and Bill put in zero dollars for the balance of the 100% ownership (once John is paid the $100K in full).

B.   Bill is the idea man. Bill manages the restaurants.

C.   For the 1st year there is a loss of $80K and no cash is distributed.  John gets the entire loss.

D.   For the 2nd year, there is a profit of $30K and total distributions of $40K.  John receives the entire $30K profit and $40K distribution.

E.   For the 3rd year, there is a profit of $400K and total distributions of $300K.  John gets 100% of the profit and distributions until his $100K has been paid back (once the remaining balance of $60K)

F.  Once that critical event occurs, John begins receiving ONLY 40% of the distributions, 40% of the profit (loss in loss years) and 40% of the FICA TIP Credit.

G.  In year 4, John sells 10% and retains 30% of his ownership interest.

H.  Sally buys  John’s interest for $80K.  Does Sally receive a priority distribution because of her $80K? No!

I.  If someone buys someone’s interest, they inherit the current status of the person they purchased from.  In the above example,  Sally will get 10% of the profit or loss and tip credit.

 I know the concept is complicated.  If you are a client and have a question, please contact me at Thank you! Jeff




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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009