When starting a new business, it`s important to have a solid legal foundation in the form of an operating agreement. This legal document outlines the ownership and operating procedures of an LLC, or limited liability company. One key aspect of an LLC operating agreement is the preferred return clause.

A preferred return is a payment made to a specific member or class of members before any other distributions are made. This return is preferred because it is prioritized over other distributions, such as profit-sharing or dividends. In essence, it guarantees a set return on investment for the preferred members.

The preferred return clause in an LLC operating agreement is important because it clarifies the distribution of profits and ensures that certain members receive their preferred return before any other distributions are made. This can be especially important in cases where some members have invested more capital or resources than others.

When drafting a preferred return clause in an LLC operating agreement, there are a few key considerations to keep in mind. First, the percentage of the preferred return should be clearly defined. This can vary depending on the business and the members involved, but it`s important to be specific about the percentage to avoid confusion or disputes later on.

Second, the clause should outline the priority of the preferred return. Typically, it will be prioritized above all other distributions, but it is important to make this clear in the agreement.

Finally, the clause should address any contingencies or exceptions to the preferred return. For example, if the business experiences a financial hardship, the preferred return may need to be suspended temporarily.

Overall, including a preferred return clause in an LLC operating agreement is a smart move for any business. It provides clarity and structure around profit distribution, and can help to avoid disputes or misunderstandings among members. When drafting this clause, be sure to consult with a qualified legal professional to ensure that it is tailored to your business needs and complies with relevant laws and regulations.