Discussion:LLC looking to reduce net income

I have a client, who's a multi member LLC. They are doing quite well this year and currently show a little over a million in net income as of June 1st. However, they have over $900K in outstanding A/R collections. When they were setting up this company (prior to the advise of their CPA) they wrote contracts with their salesmen to pay bonuses based on a percentage of net income. Now that the time is nearing for the bonuses to be paid they are feeling the impact of this contract,especially when their cashflow is not consistent.

So, they've asked me for ways to reduce their net income, however they have no cash on hand to really spend. So, I've added salaries to the payroll for the owners and set them up as due to's to be paid at a later date. We've discussed retirement plan and defined benefit options, and we've maximized the depreciation on the assets purchased.

I feel like I'm missing something big, but I'm at a loss for other options. Does anyone have any ideas?

The question posed to me today was can each owner take a distribution and have it payable in the future and then have it appear as a return on investment to avoid the tax implecation. SHeeesh.

I agree with LemRI - have them take out or increase a LOC with the bank to meet short term obligations.

Section 179 is tax accounting, not GAAP accounting. Just as depreciation with MACRS is tax and not GAAP. Of course if their books were done on a "tax acounting" basis and not GAAP, then that'd be a different story.

No expenses that you're going to try to create are going to minimize your cash flows as much as will be necessary. The only viable options seem to be base commissions off of the "cash" method of accounting or to seek short-term financing. If they are bleeding in debt because of the equipment purchases, do the members of the LLC have any additional capital they could fork into the company? If there are numerous members, perhaps the way to "promote" this is that the business has expanded much more rapidly than anticipated.

if your client feels inconsistent on CF has impacted their bonus pay-out, you might want to advise them to amend the contract with the sales person, make it to pay out based on net cash collection.

Second issue sounds like ethical issue, legally, they could accrue as much as they want based discussion above, but are they gonna pay out these accrual later on? If not, they will have more net income next year when they reverse these accrual out of bs. Which lead to more payout on bonus... butjust defer it, i guess sales person will not be that stupid not to look for all these sudden accrual. Or maybe they do not understand the game at all...

My recommendations going forward would be to restructure the commission payout to be based on the actual sales revenue amount <you can do calculations so that the amounts calculated either way would be about the same> and to make those commissions payable only upon receipt of payment by the cutomer. Many software programs can calculate commission based on this and it is not uncommon.

Bonus is based on net income but we still don't know which definition of net income we are talking about. Could be GAAP or could be tax. Generated expenses under each would be different as we all know.

To solve the current issue, rather than trying to generate expenses, take a hard line and be truly valuable. Give them their legal options, but then recommend the change above and make sure they choose a commission amount that they can live with.

Kinda sounds to me like they made promises to the sales staff that they shouldn't have.

If it is truly about cash flow, then have them renogiate with the staff, explain to them that yes, the commission is theirs, but they will receive it when payment is received by customer. I'm figuring the staff would prefer to have their payments delayed as opposed to being "creatively denied" their commission.

If they are established, their are numerous companies that will factor their receivables for them so they can pay.

You know what gets me in these deals is that we have no problem trying to figure out ways to creatively deny these kinds of obligations, but then we get on our high horses about the EIC issues that we all just love to debate over and over.

The real problem is that the money isn't there, and it doesn't look like it's going to be. The client is trying save face by getting the accountant to take the position of reducing income temporarily instead of having to tell the employees that they screwed up.

This may be one of those times when a general employee meeting needs to be called to put the problem on the table to resolve the matter. It's never pretty, but it is honest.

The owners originally agreed to the bonus contract before the company was even started and were obviously not anticipating the rapid growth they've experienced or the collection issues they are having. Selling off the A/R is not an avenue they want to pursue right now or probably ever, these are two gruff construction types who "know everything".

They have resigned themselves to bite the bullet this year and correct it going forward. They are going to have a meeting and let the guys know the bonuses will have to be deferred until they can collect the funds.

Everybody always knows every aspect of their business, especially when it comes to tax, accounting, and legal issues. It's amazing how many self-proclaimed "experts" there are. But in reality, these guys really should have some other people there to manage the business side of things. While a lot of people don't like working for others, they should also know their limitations as well and have others work for them so they do better.

Good luck with that client.

Tell the owners to stop being cupcakes and suck it up, negotiate a payout with the salespeople and then restructure the commission to be based on collections.

Seriously, the best thing to do is to give the sales staff promissory notes for their bonuses, 9 to 1, the IRS will consider this current compensation, so there will be withholding, and taxation without relaxation. In this way, the staff will actually owe the co. money for the withholding, and the shoe will be on other other foot. This is similar to how the company stores worked in the "Grapes of Wrath".

Or, if they are really smart, they will give these salesmen a "profits interest" in the entity. Something like this "Listen up boys (and girls), instead of, not in lieu of, instead of these bonuses, we are awarding profits interests in future profits to you." (Key word "future profit". Then, immediately raise GP's to owners so there is no future profit). As far as I can tell, no one knows exactly what a profits interest is, but it's not a true ownership interest in the LLC, and is very likely unenforceable by the sales staff, and not worth the paper it's written on, but it sounds good, and should keep the staff mollified. Just some stuff I picked up while I was at Anderson. Please check with a competent accountant before doing any of this. I was cashiered from the Guam Society of CPA's after Enron, yes, old custom here where they actually pull the stripes off your suit.

P.S. salaries to owners of a MMLLC? I'm sure you don't mean W-2 salaries, but GP's, perhaps? And remember, thos GP's are payable in good times or bad. A fact often overlooked.

Jeez, have them go get some financing on their AR, if they can't get financing, it should tell you something about the quality of the AR.

Back in '29 (when we had the last bust), I was selling concrete right out of highschool. This was in the days when a man had to work for a living, and none of this pussyfooting around you see today, with employees expecting air-conditioning and heat at work.

Anyway, you ever try to sell concrete when there's no building going on? I remember the old boss, James Patterson. When things would get slow, he'd load 10 trucks full of concrete and say "Boys, that concrete will be plumb dry in two hours, and if you don't want to bust it out by hand, you better get it sold."

Why, I sold it, let me tell you. One time, I filled both the mayor's and the entire councils swimming pools up with concrete on a government boondoggle, and then turned around and charged the city for having it removed. Another time, we literally put over 1000 cu. yd. in a hole in the ground for a federal project. Never figured out what that was for. Then, I had a Mob hookup, and we took care of a lot of thier problems (let's say we encased their problems in concrete), living statuary, I called it. And they paid brother, on time! (And no, you are not gonna get me to tell you where Hoffa is, *wink*.).

Anyway, I'd say, raise the bonus scheme to 15% of gross profit in this environment.

And you need to copyright (right? You're the legal bird) this stuff for the next great american novel before someone steals it. Thanks for the Friday (the 13th) end of the week humor. It's been a veeeerrrry long, relatively unproductive one, with everyone seeming to be wanting to pick on me! Boo Hoo - I'm going to depart to the drinking hole for a GT (gin & tonic).

Probably shouldn't. But, for the record, this has been the best friggin Friday the 13th ever.

Nats, I have stuff to tell you.  :-)

And for all you sissies out there, we didn't bet on no NASCAR or tennis or golf back in those days. It was the hard stuff: football, baseball, horseflesh and greyhounds. And back then, greyhounds would bite; practically take your arm off if you let 'em. But, I didn't let em, I stayed on duty at Gumblemans making money by taking bets for the boys.

Well, as often happens in life, something happened. Through Sal, I met a Pole by the name of Mier Suchowljansky. I'll call him "Mr. L", and leave it at that because his hand can still reach from the grave, and I've got a few real teeth left I'd like to keep.

Anyways, within a month I was in the stable, and my job was to get the bosses breakfast on the table for him each day. He was particular about his breakfast. He'd have lox and bagels if he could get em, but that wasn't easy to find in those days in Hallandale FL. So, he'd have his coal black Cuban "Cafe", his eggs, and his bacon. In that order, and it better be right, or else. Cont.

Between "get me my breakfast" and "get me my beer" (he had one a day), we got to be passable friends, if I can say that, and I'd play cards with him, gin rummey. And he says to me one day "you know, you're ok kid, you might can help me sometime with the books".

Well, the question naturally comes up, did you ever kill a man? Haven't most accountants killed someone? But I never really did. I erased. I rubbed out. I took out of the picture; but kill? No, never that. I wouldn't call it that.

But I did mess up the drapes for somebody once I think, messed up the couch and the wall too. And, it was over Crystal. Crystal Devine.

But it fit, see. Don't ask me how they did it. Crystal's mom broke her hip on June 10, 1947 , she didn't remember how she fell. And we were going to Vegas to look after her. And I was given a gun. I was given a gun on June 13, 1947. On June 20, Las Vegas changed forever. I didn't know it had changed though, not exactly, cuz I was driving back to Vegas from L.A. late, late the evening of June 20. Had a little business in Beverly Hills I had to tend to. And oh, did I sleep, sleep, sleep when I got back to the hotel, slept the whole next day. But I woke up, somehow.

The books balanced after that. I felt like a real accountant, a guy that could make things work out for a client; and real accountants can't have women like Crystal, for a lot of reasons. I had to lose her for my own stupid ends. And I was off to Guam. I could pour concrete, buy concrete with the money I had now. And some old pals of mine needed some runways laid down in Guam. What did I learn from Mier, what did I lose? I'll never know. But, books I did learn. It was like learning to play violin from Paganini, to learn how to keep two sets of books from the boss. The master, the Mensch. The End, for now... "The True Autobiography of a Guam Accountant, Copyright 2008" Thanks Raymond, I'll have a gimlet now, half gin, and half Roses lime juice.

And don't blame it on me Fred. I had nothing to do with this. I told Crow a long time ago he had to be careful about what he said on here because people might believe what he says . . . or not.

Back to the question at hand, I agree the bonuses should be paid off the gross collections. However, if the salespeople have an impact on the bottom line (besides the amount of sales they generate), I can see why that might be used as the base for calculating the bonus.