Tax distribution

Definition

Cash a pass-through business pays owners so they can pay its tax bill.

Why It Matters

Two things decide whether the clause works, and the rate everybody argues about first is only one of them. It lives in the operating agreement rather than in a decision made each spring, so a percentage drafted around one person's bracket quietly underpays anybody in a higher one the year profit is larger. The other is the lender: a credit agreement that blocks payments to owners blocks this one too, which is how a good year turns into a bill somebody funds out of savings. Ask for the clause and the lender's consent together, because either on its own is worth very little.

In numbers: A 30% assumed rate on $250,000 of allocated profit distributes $75,000 to cover the tax, and an owner in a higher bracket funds the rest themselves.