a new LLC

[mmaker]

jointly owned LLC - hiring another LLC and taxes

So I started an LLC with some people I know. (oh boy, friends)

Their argument is they want to "hire themselves" (one of their other LLCS) to lower the taxes of our jointly held business.

But the original LLC is taxed as a partnership, and by hiring ourselves we are not going to be saving any taxes OVERALL....just shifting money to our personal tax returns...right?

UNLESS, their LLC is an S corp and then they can take distributions out without social security taxes. But then this seems like we would be getting into the neighborhood of a controlled group by IRS standards.

(the S corp) would then able to pay a salary and then pay distributions without the social security tax. But once again a controlled group....

Is that the only argument they have (paying a S corp)? Or are they confused.

thanks,

Matt

 

[ColinCPA]

Partners in LLC's cannot be employees, so yeah, it seems that they are confused. Also, I've never heard of establishing an entity as an "employee", so I don't quite understand what they want to do. Even if they could do this, there are no savings from paying themselves wages.

 

[Samir]

Partners in LLC's cannot be employees...

Is this for certain types of LLCs (single member, c-corp, etc.), or just in general?

 

[ColinCPA]

Is this for certain types of LLCs (single member, c-corp, etc.), or just in general?

Do correct me if I'm wrong.

You wouldn't be a partner in a corp or a single member LLC. I don't believe you can issue yourself wages in a single member either, but also correct me if I'm wrong.

 

[Samir]

Do correct me if I'm wrong.

You wouldn't be a partner in a corp or a single member LLC. I don't believe you can issue yourself wages in a single member either, but also correct me if I'm wrong.

The reason I brought it up was because I thought we had partners employed in on of our LLCs, but it's actually a general partnership.

I've never heard of any restrictions. In fact, there's a benefit since you can end up paying self-employment taxes and both the company and personal contribution yourself.

 

[ColinCPA]

AICPA - Partners as Employees? Properly Reporting Partner Compensation

The IRS holds the view that partners cannot be treated as employees.

 

[Samir]

AICPA - Partners as Employees? Properly Reporting Partner Compensation

The IRS holds the view that partners cannot be treated as employees.

Thank you very much for the link to the article. Seems like it is done, but that it's not the right thing to do.

The article doesn't specify this, but in your opinion do you think this also applies to members of an LLC when the LLC is being treated as a partnership on the 1065?

 

[ColinCPA]

The tax code doesn't have a specific set of rules for an LLC, and considers an LLC filing as a partnership a partnership. Therefore, I would say LLC members are treated the same as general or limited partners in this regard.

Also, § 3401(c) defines an employee:

For purposes of this chapter, the term “employee” includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term “employee” also includes an officer of a corporation.

Note it's clear about officers, not partners or members.

 

[Samir]

Gotcha. That's the way I was interpreting it as well even though it doesn't mention LLCs specifically.