The Company Is Profitable but I Am Not Being Paid Distributions

What the Code gives you, and does not

Texas LLC law is blunt about this. Section 101.204 provides that a member is not entitled to an interim distribution, meaning one made before winding up, until the governing authority declares it, for all members or for a class that includes the member. There is no statutory right to a share of profits as they are earned. Once a distribution is declared, section 101.207 gives the member the status of a creditor for that amount, with a creditor's remedies, so a declared but unpaid distribution is a debt you can sue on. Until then, the decision belongs to the managers or managing members, subject to the company agreement and their duties.

Two further statutory points shape the dispute. Section 101.203 says distributions, when made, are shared in proportion to the agreed value of each member's contribution as stated in the company's records, unless the agreement provides otherwise, so a manager cannot declare a distribution for himself alone unless the agreement creates classes. And section 101.206 forbids any distribution that would leave the company's liabilities exceeding the fair value of its assets; the same section excludes from 'distribution' reasonable compensation for services, which is the hinge of most of these fights.

Read the agreement before the Code

Most well-drafted company agreements address distributions, and the clause decides your position:

• Mandatory tax distributions. A requirement that the company distribute enough each year to cover members' tax on allocated income, usually at an assumed rate. If yours has one and it is not being honored, the claim is a straightforward breach of contract.
• Distribution of 'available cash' or 'net cash flow.' A promise to distribute what is left after expenses and reserves, often with discretion over the reserves. The fight is then about whether the reserves are reasonable.
• Discretionary distributions. Language leaving timing and amount to the managers, which is where the Code's default lands you.
• Compensation provisions. Whether managers may be paid, by whom their pay is set, and whether it needs disinterested approval.

If the company agreement grants you a withdrawal right, the fair value of your interest is payable within a reasonable time after you exercise it (§ 101.205). Most agreements do not, and the Code otherwise bars withdrawal.

The phantom income problem

An LLC taxed as a partnership does not pay federal income tax itself. Each member reports his distributive share of the company's income on his own return whether or not any cash was distributed (26 U.S.C. § 702). A minority member allocated $120,000 of profit owes tax on $120,000 even if he received nothing. This is lawful. It is also the most effective pressure a controlling owner can apply, which is why withholding distributions appears in nearly every freeze-out, and why courts take notice of it when it is paired with insider compensation.

When withholding distributions becomes actionable

The managers' discretion is real, but it is not unlimited. Three patterns support a claim.

Disguised distributions

The controlling owners declare no distributions but take the profit anyway: salaries far above market for the work, discretionary bonuses to themselves, above-market rent to an entity they own, company-paid vehicles and travel, family members on payroll. Section 101.206(f) protects only reasonable compensation for services. Everything beyond that is a distribution that was not shared under section 101.203, and setting one's own pay without the approval the agreement requires is self-dealing, covered in self-dealing by a partner or manager.

Breach of the agreement

A tax-distribution or available-cash clause ignored, or reserves inflated far beyond anything the business needs, is a breach of contract the court can remedy by ordering the distribution and awarding damages.

Freeze-out

Withholding distributions, excluding you from information and decisions, and then offering to buy your interest for a fraction of its value is a pattern Texas courts recognize. The remedies are narrower than in some states: Ritchie v. Rupe (Tex. 2014) held there is no common-law claim for shareholder oppression and that the receivership statute is the remedy for oppressive conduct, defined as abuse of authority with intent to harm an owner in a way inconsistent with honest business judgment. Section 11.404 allows a receiver where governing persons act oppressively or fraudulently or waste assets, and section 11.314 allows a winding up where the company's economic purpose is unreasonably frustrated. The fuller picture is in whether minority shareholders have protection from oppression in Texas.

Example

Suppose a Plano HVAC company is owned 70/30. The 70 percent member manages it. For three years the company earns about $600,000 before owner pay. He pays himself $450,000 in salary and bonus, leases the shop from his own entity at twice the going rate, and declares no distributions, citing 'growth reserves' that sit in a money market account. The 30 percent member receives K-1s showing roughly $40,000 of income each year and pays tax on it. The agreement allows managers 'reasonable compensation' and says available cash 'shall be distributed annually.' The minority member has a contract claim on the distribution clause, a fiduciary and self-dealing claim on the compensation and the lease, and a records demand to prove both. The damages model is the excess compensation and rent, treated as distributions that should have been shared 70/30.

Corporations

The analysis is similar. Dividends are declared by the board in its discretion, within the limits of section 21.303, which bars a distribution that would render the corporation insolvent or exceed the distribution limit. Shareholders cannot compel a dividend, but directors who pay themselves the profit while declaring none owe the corporation duties of loyalty, and in a closely held corporation section 21.563 lets the court treat the resulting derivative claim as the shareholder's own.

What you can do, in order

1. Get the numbers. A written records demand under section 101.502 for the general ledger, payroll, related-party contracts and bank statements. The company owes you attorney's fees if it refuses (§ 101.503); see an LLC member's right to records.
2. Match the facts to the clause. With counsel, decide whether the claim is contract, fiduciary, both, or neither.
3. Demand in writing. A letter identifying the clause breached and the disguised distributions, with the numbers, often produces a tax distribution or a buyout offer.
4. File if needed. Claims for breach of the agreement, breach of fiduciary duty and an accounting; derivative where the company was harmed, with the closely held exception in section 101.463; a receiver or winding up only where the facts fit the statute.

Deadline

Four years for breach of fiduciary duty under Civil Practice and Remedies Code section 16.004, and generally four years for breach of a written agreement. Each year's withheld distribution and each excess payment is its own breach, so older years may be lost while recent ones remain. Note also that an action to recover a distribution that violated section 101.206 must be brought within two years of the distribution.

When to involve a litigator

When the second K-1 arrives without a check. By then the pattern is visible and the records demand can be targeted. Tina Wysk represents minority and majority owners in distribution and compensation disputes in Dallas state and federal courts and in arbitration.