Discussion:LLC Salaries
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Jrgconsulting (talk|edits) said: | 20 November 2007 |
| Hello, I have just recently formed an LLC for my IT consulting business. My LLC is setup as a partnership between my son (1%) and me (99%). I will be the only one generating income for the business and am trying to determine how I should deal with the income generated. In looking at other postings here, it seems that I need to set up a system of guaranteed payments to myself. My question is this: I have seen that employees of S Corps can be given a reasonable salary and then be given a distribution later for the remaining amount to avoid some tax hit. Is this possible with an LLC? Or, given that my LLC is set up as a pass-through, is this not possible? Should I just routinely move all or most income from the corporate account into my personal account? What are the ramifications of doing so? I know this may be a novice question, but I'm just getting started and am trying to figure it out. Any help would be greatly appreciated. Thanks. | |
| 20 November 2007 | |
| I strongly suggest that you seek competent professional advice on a multi-member LLC. Competent is the key word, because not every CPA, atty., EA etc. knows everything about them. Ask around. The self-help books, and the websites can only take you so far, they will not pay your audit expenses, or your legal fees. I don't think you will regret it. | |
Jrgconsulting (talk|edits) said: | 20 November 2007 |
| Yeah, I'm going to be talking with an accountant, but I was just trying to get some info on my own for comparison... | |
Johnhuddleston (talk|edits) said: | 20 November 2007 |
| I don't think this is a novice question. I usually do this with an S Corporation. By the way, you can elect to have your LLC taxed as an S Corp and remain an LLC for state law purposes. In general, when you work for an LLC, all your LLC profits are subject to self employment taxes. It may be possible to own separate interests (one as a member manager and one as a limited interest). The member manager interest would be subject to self employment tax. The limited interest would not. If you do this, you should have a guaranteed payment to yourself that is reasonable. This is still somewhat aggressive. It may be a stronger case if your wife owns the limited interest and you own the member manager interest. It's all somewhat of a muddy area with not much guidance. I find it clearer with an S Corp. With an S Corp, the profits are not subject to SE tax. The only issue is reasonable salary. You can read my article on this subject at http://huddlestontax.com/id16.html. Also, with an S Corp, if you leave the money in the business account, the IRS can't decide that it is salary. They can rename transactions but they can't create them. Remember, this is only about saving some self employment taxes. It's all subject to income tax since it is a flow through.
John Huddleston http://huddlestontax.com | |
| 20 November 2007 | |
| One problem may be that he wants to allocate more profits to the son than an S. would allow (i.e. by strict stock ownership). And this is where things may go wrong, even with the mmLLC. I figure the 1% is there for a reason. | |
Johnhuddleston (talk|edits) said: | 20 November 2007 |
| I agree with CrowJD. One of the nice things about an LLC is that you can allocate profits however you want so long as there is a substantial economic basis for the allocation. With an S Corp, you would have to give the son a salary if you wanted more profit to him.
John Huddleston http://huddlestontax.com | |
| 20 November 2007 | |
| John, can you put in normal English what substantial economic (effect) basis is? I'm serious, because this is where I get confused too, and I need to read up on that point. Is it like the Supremes' definition of pornography, "We know it when we see it."? | |
Jrgconsulting (talk|edits) said: | 20 November 2007 |
| Thanks for the comments. Unfortunately, I needed to set my company up rather abruptly, and on a friend's advice who had done it before, I chose to create an LLC, rather than an S Corp. Given what I've read now, I might have chosen differently. That being said, upon setting up the LLC, I gave my son a 1% interest because I was told that single party owned LLC's were more liable to be audited potentially (not sure if that is true or not). As my son is not doing any work for the company, per se, I was not planning on paying him or making any distributions to him of any kind. All that being said, I'm just trying to figure out the best way to distribute the company's income to myself. Given that it is all subject to SE tax, should I just routinely move all (or most) money received to my personal account? Or should I leave some amount in the company's account? What potential benefit could I get from doing this? Again, thanks for your comments on this... | |
Johnhuddleston (talk|edits) said: | 20 November 2007 |
| It's been a long time since I studied that. As I recall, it's pretty liberal. I think if you can point to any non tax planning reason for the profit distribution allocation, you are okay. However, I don't recall any of the cases where it was questioned. Sorry.
John Huddleston http://huddlestontax.com | |
Johnhuddleston (talk|edits) said: | 20 November 2007 |
| Jrgconsulting, You are taxed on the profit regardless or whether you distribute the profits. I had not heard of the audit distinction between multimember LLCs and single members. It seems like it just creates more work because a multimember LLC needs to prepare a 1065. However, I think you are fine. If you want to be taxed as an S Corporation, you can still make the election. Many people do it that way on purpose (create an LLC then elect to be taxed as an S Corp). If you need help with this, call me. My contact info is on my website.
John Huddleston http://huddlestontax.com | |
| 20 November 2007 | |
| Maybe there have not been enough cases for any development, it seems that no one over at the Service wants to tackle the 1065 returns for a "look-see". I have two Surgent-McCoy CPE books on mmLLC's, and they cover the subject rather briefly, to say the least. I agree with you, seems like any non-tax reason will do. I don't think it was defined too well to begin with. | |
| 20 November 2007 | |
| Jrg: it's always rather dangerous to make assumptions regarding audits. It's true that the 1065 is audited less frequently (from what we know), but the stats. we get are always a little old. The IRS has hired a lot of new people, and if they can keep them on long enough, and get them trained, I would expect them to take a look at the 1065s on a more frequent basis. | |
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