Understanding Waterfall Provisions In LLC Agreements

When establishing a new business, business owners typically want to ensure that any agreement they enter with other partners can offer them adequate legal and financial protection. A standard legal agreement between business partners is likely to contain waterfall provisions, which outline the distribution of assets and money between its owners.

What Are Waterfall Provisions?

According to the American Bar Association, waterfall provisions outline how distributions move from an investment to the business's partners or members and are usually used in a limited liability company or partnership agreement. This is a significant element of the agreement as it outlines each individual's reward for their contributions to the company. In this type of agreement, some partners often receive a higher proportion of the distribution, depending on the distribution tier or type used, hence why "waterfall" is part of this term. As per the Small Business Administration,