Let's say you bring on a 50/50 business partner. You both invest $100,000.  On paper, that’s even, but the capital flow starts diverging the moment your business earns its first dollar.
 
If one partner takes an early distribution for “reimbursement,” and the other doesn’t, you’ve just changed ownership economics without realizing it.
 
That one transaction could:
 

• Shift the partner’s capital account; 
• Alter how future profits and losses are allocated; or
• Even cause a taxable event if it’s not properly documented

 
Your OA should clearly define what is a contribution, when money can be distributed, and how those movements affect ownership percentages.

How you pay yourself depends on your entity type and what your OA permits.  

The OA acts as your company’s rulebook for how cash leaves the business and whether those payments are treated as compensation, return of capital, or profit distributions.

Here’s how it plays out across the most common structures:

Entity Type	How You Get Paid	Operating Agreement Controls	Tax Impact
Single-Member LLC	You take owner draws — not payroll	The OA defines how and when the owner can withdraw funds.	Draws are generally tax-free. You pay income and self-employment tax on net income, not on draws.
Multi-Member LLC / Partnership	Members receive distributions and possibly guaranteed payments	The OA must define profit allocations, guaranteed payments (for active members), and how capital accounts are adjusted under certain conditions.	Partners are taxed on their share of income whether or not cash is distributed. Guaranteed payments are subject to self-employment tax.
S Corporation	Owners take a reasonable salary (W-2) plus dividends/distributions	The OA defines dividend rights and ensures distributions are proportional to ownership. It also governs how retained earnings are tracked.	Wages are subject to payroll tax; distributions are not — but must align with ownership %. Improper allocations can void S corp status.

Years later, let's say you sell an asset and distribute proceeds back to members. Most people call this a “return of capital.” But depending on each member’s capital account, it could be:

• A tax-free return (if within their basis), or
• A capital gain (if it exceeds their basis)

The difference can mean thousands in taxes and it all hinges on how your OA tracked contributions, earnings, and prior withdrawals.  Below are some common scenarios we see:

Situation	How It Looks	Tax / Economic Impact
Partner takes an early distribution before profits	$30k paid out to one partner, not the other	Treated as an advance distribution.  It may distort ownership % or trigger taxable income if not recorded properly
Business reinvests $200k of profit	No cash distributed	Owners still owe tax on their share of profit.
Distributions after selling property	Partners receive cash after sale	Tax-free to the extent of basis; any excess = capital gain
Owner repayment of loan vs. distribution	Repays $50k “loan” to owner	If OA and books don’t document it as debt, IRS may reclassify as taxable distribution

Your Operating Agreement translates every dollar that moves through your business into a legal and tax consequence.

We encourage founders to read their OA like a capital map:

• How Money Enters;
• Who it belongs to; and
• What happens when it leaves.

Need help interpreting yours?  Let us know!