Regardless of the method of calculating the allocation, the practitioner should ensure that all terms used in the allocation formula are clearly defined in the agreement. For example, how are net sales receipts or uncashed capital defined? Where distributions are made on the basis of the members` uncashed capital, it is necessary not only to define the concept of `uncashed capital`, but also to provide for a date on which the calculation of the unpaid capital will be carried out. Organizers may also wish to limit members` ability to make capital contributions just prior to the calculation date. When setting the interest rate, organisers should take into account the possibilities for further investments, the risk associated with the operation of LLC and the likelihood that the capital will be committed for a longer period. If the articles of association and the company agreement allow for the contribution of non-valued assets, the agreement should specify how those contributions will be valued and determine the amount on which interest is calculated and paid. If capital deposits can be made throughout the year, the agreement should contain a provision that interest is incurred on the date of filing. The agreement should also specify how and when distributions decrease the amount of principal on which interest is paid. The company agreement should deal with all kinds of allocation issues, not just the general allocation of income or losses. Major controversies over the allocation of items such as cancellation of debt income, capital gains or losses, and alternative minimum tax adjustments and preferences can be avoided if the allocation of these items is included in the company agreement. While an overall distribution of income and losses may cover these items, specific provisions may better reflect the intention of members. Many states prohibit distributions if the LLC was insolvent after distribution.
Where such a prohibition exists, the legal remedy for a prohibited distribution is generally either to require the members to make the distribution surplus or to make the members or managers who authorized the distribution responsible for the franchise. If this is a problem, the organisers should take into account a similar restriction in the company agreement. Since most LLCs are created to provide limited liability to members, it is unlikely that a member will agree to reinstate a deficit capital account. The Safe Harbor Rules provide that certain endowments to members without an obligation to restore deficit capital may still have significant economic repercussions. . . .