Corporations (C and S) do not have the ability to allocate distributions of available cash to the partners in any way that is contrary to their percentage interests (pro rata). It’s really simple for them which can be good or bad depending on your goals. On the other hand, partnerships are the opposite. They provide super flexibility when it comes to allocations of profits and losses to the partners as long as the agreement has substantial economic effect (i.e. actually following the agreement).
By way of example, a partnership agreement can state that the money partner (the investor) receives 100% (or any greater percentage really) of all available cash or profits until it receives its investment. The provision can further build in a preferred return for the investor as well. Ultimately, in practice you’ll find that the partners will share distributions in accordance with how they agree. Sometimes that’s by percentage interest (pro rata) and sometimes it’s not. This issue is an important one when raising capital and also choosing which entity to form. Sophisticated investors know this and you’re at a disadvantage if you do not. Again, there are legal and tax implications for forming each type of entity. Getting it right is important from the outset or you’ll pay for it later, literally.
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