In a business like yours—focused on retail and merchandising—defining “Hard Costs” is vital because it determines exactly how much money is left over for the members to split each month.
Since your agreement says distributions are made “less hard cost,” you are essentially defining your “Net Profit.” Here is a breakdown of what that looks like for JK Knockout LLC:
1. Direct Product Costs (COGS)
These are the most literal “hard costs.” If you don’t sell a product, you don’t incur these.
- Manufacturing/Wholesale: What you paid to create or buy the retail items.
- Packaging: Boxes, mailers, and branded tissue paper.
- Shipping & Freight: The cost to get products from the manufacturer to you, and from you to the customer.
2. Operational “Out-of-Pocket” Expenses
In the retail and speaking world, these are payments made to third parties to keep the business running:
- Travel Expenses: Airfare, hotels, and meals specifically for speaking engagements.
- Merchant Fees: The 2.9% + $0.30 (approx.) that credit card processors (like Shopify or Stripe) take from every sale.
- Venue/Booth Fees: Costs for space at trade shows or speaking events.
- Independent Contractors: Payments to outside graphic designers, photographers, or event staff (not the members).
3. Fixed Overhead
While some people call these “soft costs,” in an LLC operating agreement, they are usually deducted as hard expenses before distribution:
- Software Subscriptions: Shopify fees, email marketing (Klaviyo/Mailchimp), and accounting software (QuickBooks).
- Storage/Warehousing: Rent for a space to hold your inventory.
- Insurance: Product liability or general business insurance.
How to Write This Into Your Agreement
To avoid arguments between Joe, Jackie, and Gary later, you can add this specific clause to Section 4 of your agreement:
Definition of Hard Costs: For the purposes of calculating monthly distributions, “Hard Costs” shall include all direct, documented expenses paid to third-party vendors. This includes, but is not limited to: cost of goods sold (COGS), shipping and fulfillment, merchant processing fees, marketing spend, travel for speaking engagements, and necessary software subscriptions. Hard costs do not include member draws or discretionary spending exceeding $[Insert Amount] without majority approval.