b'How to Legally Raise Private MoneyBoth Class A and Class B members will receive distributions based on their ownership interests.Class A may be offered a preferred return. Preferred returns can be cu-mulative, so that even if no cash is available to pay it, it will be paid at some future event. They can also be noncumulative, which is not as com-mon. Preferred returns are typically calculated on an annualized basis but determined quarterly.If the preferred return is cumulative, arrearages would be made up at the next distribution event prior to paying current returns. Arrearages could also be deferred until a capital transaction, such as refinance or sale of the property, depending what your company agreement says. In this case, arrearages are paid after refunding Class As capital con-tributions, but before paying distributions to Class B or splitting equity between Class A and Class B. All of this is spelled out in the company agreement.If the preferred return is noncumulative, Class A members get all of the distributable cash needed to make up their preferred return for the current distribution period, but deficiencies do not accrue.Class BService ProvidersClass B is the service class. This class typically includes members of the manager and/or others who provide services to the company, as deter-mined by the manager. Class B members retain the ownership interests in the company that are not sold to Class A in exchange for a nominal amount (usually $100 or $1,000 total) plus their noncapital contributions to the investor entity. By paying for their interests, Class B can establish a cost basis for their investment so that when they do receive distributions, they may be taxable at capital gains rates versus ordinary income rates. When self-employment is involved this potentially excludes self-employ-ment tax, depending on the nature and duration of the investment.Class B members only receive their portion of the distributable cash during operations after Class A members have received their preferred returns. On a capital transaction Class B only receives distributions after Class As capital contributions are refunded and any arrearages in Class A preferred returns have been paid. Thus, Class B is subordinate to Class A. This is important for tax purposes, because if Class A and Class B are on par, meaning that they are only splitting profits, with no preference to 80'