Discussion:LLC Profit-Sharing With Non-Voting Non-Members?
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Discussion Forum Index --> Advanced Tax Questions --> LLC Profit-Sharing With Non-Voting Non-Members?
Discussion Forum Index --> Tax Questions --> LLC Profit-Sharing With Non-Voting Non-Members?
| 24 April 2008 | |
| I am creating a single-member LLC in the state of Nevada. I have two friends interested in helping to finance the startup in exchange for a share of the business profits.
i.e. Investor #1 provides $10,000 in exchange for 5% of the companies profits. Investor #2 provides $50,000 in exchange for 25% of the companies profits. Neither of these investors will be members of the LLC, managers or have voting rights, again, just a single-member LLC. How can I go process a setup like this since an LLC is unable to issue stock? | |
RoyDaleOne (talk|edits) said: | 24 April 2008 |
| Profile please. | |
| April 24, 2008 | |
| Regardless of your profile, see a tax attorney and accountant, and don't waste your time on the internet doing NV LLC's. You'll have to register, file and pay taxes in whatever states you're doing business in, and NV won't do one bit of good except take money out of your wallet. See, you learned something already. Good luck. But I think what you want to do is doable, if that helps. | |
| 28 April 2008 | |
| Hi JR,
Thanks for the input. My business is going to be all online and I won't be selling tangibles in any states. It's just a social networking site that will generate revenue via affiliate agreements and banner ads. So I'm not really worried about the issues of states and all that. I'm just trying to figure out how I can provide a share of the profits to non-members of the single-member LLC? | |
| April 28, 2008 | |
| Well, sorry, not letting you off the hook. The NV LLC still does nothing but increase cost. If nothing else, you'll have nexus where you are, and are required to file biz and personals there, in addition to wherever you organize. So don't bother with NV.
And again, yes, you can have different ownership interests in an LLC. See a good tax attorney to draw up the agreement and set the parameters. (But I'll lay odds you'll try to Google something.... | |
| 28 April 2008 | |
| Hi JR1,
Yes, I am obtaining Nexus within Nevada. I am getting a phone #, physical address, registered agent and a bank account all in the state (I'm in MA) I will be the member/manager and eventually the LLC may grow to expand from a single-member entity into something with multiple members and/or employees. Just trying to keep it simple right now. Thanks again for your responses. :) | |
| 28 April 2008 | |
| So, now you'll have to file returns in both NV and MA. How is that an efficient use of your money and time? But, you main question is more legal than tax, so follow the advice you were given and get a good lawyer who is licensed to practice in both NV and MA and any other state that where your investors reside, and have him draw up a good operating agreement with particular attention to how the LLC will handle an investor wanting to get out, well, get his money back, retire, etc. Also, talk to him about which state laws will apply if your investors sign the agreement in MA and not in NV. | |
| 28 April 2008 | |
| G-gnu, I think JR, Lion and I are also non-voting, non-members. We vote 100% in favor of you finding professional help in advising you. | |
| 28 April 2008 | |
| Grandgnu, Lion has given you good advice. There is no state tax benefit to the structure you propose, and you certainly are not "keeping it simple." In fact, you are creating (probably unnecessary) complications for yourself. Massachusetts does not impose an entity-level tax on LLCs unless they elect to be taxed as corporations, so there is nothing to be gained tax-wise by not oranizaing the LLC in Massachusetts. There IS a fine of up to $500 per year that can be imposed on a foreign LLC that is doing business in MA without registering, and there are some legal implications that might give you pause. You may want to take a look at Mass. Gen. L. ยง 54 to be sure you are comfortable with the possible legal implications of not registering the LLC to do business in Mass.
If you think you will obtain superior liability protection by having the LLC organized in Nevada, you may be right, but according to CrowJD, one of our leading contributors here, those advantages may not be realized unless the corporation's assets are all maintained in a Nevada state chartered bank. As a Massachusetts resident, of course you will be subject to state income tax on the income flowing through from the LLC to you. Any future investors will also be subject to state income tax on their distributive shares in the states where they reside. Since it appears that you will be running this operation from your home or office in Massachusetts, your future investors will probably also be subject to Massachusetts individual income tax on their distributive shares of its income. Their home states may allow credit for the Massachusetts tax. | |
| 2 May 2008 | |
| As an aside from the more important questions above - why do you want this to be only a single member LLC? You can structure membership interests in several different ways - including only profits interests that have no management ability. | |
| 6 May 2008 | |
| I went with a single member LLC because the legality of setting it up seemed much simpler than doing a multi-member (plus my investors are in two separate states)
This is my first time setting up an LLC, so wanted to go the simplest route and then it can always be adjusted later for multiple members, switched to an actual corporation, etc. | |
| 10 May 2008 | |
| Simplest route is to see a good business attorney. You have too many holes in your business plan for this to be a DIY project. | |
