LLC and Guaranteed Payments


D

dickens

Hello,

I've recently created an LLC and have been researching Guaranteed
Payments, Member Draws, and EOY Member Distributions and found
conflicting data.

1.) Does an multi member LLC defaulting to be taxed as a partnership
HAVE to pay a reasonable salary (in the form of a guaranteed payment)
to it's active members? I know a member of an LLC taxed as a
partnership is not an employee, therefore does not receive a W-2 which
confuses when people state a reasonable salary must be payed to the
members. The members of our LLC don't want to be paid a salary, we
are all satisfied with taking our cut at the end of the year as we all
have an equal workload within the company.

2.) If a "reasonable salary" is not MANDATORY and no Guaranteed
Payments were made to members, can the only financial transaction from
the LLC to the members be the distribution all profits/losses at the
end of the fiscal year to avoid the concept of paying estimated tax
payments to the IRS. Or do we wind up paying estimated taxes anyways
on the member distribution estimations for the next year?

3.) If I am required to pay estimated taxes due the answer to question
2 above, (We formed the LLC in '06 we are still inactive and may well
be active all of '07. Will definetely be operational by '08), would i
have to start making estimated payments in '08 or '09.

Thanks
 
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P

Paul Thomas, CPA

dickens said:
I've recently created an LLC and have been researching
Guaranteed Payments, Member Draws, and EOY Member
Distributions and found conflicting data.

1.) Does an multi member LLC defaulting to be taxed as a
partnership HAVE to pay a reasonable salary (in the form
of a guaranteed payment) to it's active members?


No.


I know a member of an LLC taxed as a partnership is not
an employee, therefore does not receive a W-2 which
confuses when people state a reasonable salary must be
payed to the members.


There's no "wages" provision for partners, reasonable or otherwise.



The members of our LLC don't want to be paid a salary, we
are all satisfied with taking our cut at the end of the year as
we all have an equal workload within the company.

That's fine. In fact, as well as reality, the profits can be drawn down
throughout the year.




2.) If a "reasonable salary" is not MANDATORY and no Guaranteed
Payments were made to members, can the only financial transaction from
the LLC to the members be the distribution all profits/losses at the
end of the fiscal year to avoid the concept of paying estimated tax
payments to the IRS. Or do we wind up paying estimated taxes anyways
on the member distribution estimations for the next year?


The IRS will deem the LLC profits are earned ratably over the year.
Quarterly estimated tax payments will be expected. It's not going to be
based on when the partner pulls the draw from the pearnership, but when the
profits are earned by the partnership that matters, and yes, the IRS will
look if you push them.




3.) If I am required to pay estimated taxes due the answer to question
2 above, (We formed the LLC in '06 we are still inactive and may well
be active all of '07. Will definetely be operational by '08), would i
have to start making estimated payments in '08 or '09.


You can skate through 08 if the partners otherwise meet one of the
safe-harbor rules on estimates.

08 estimates will be based on 07 tax liabilities for each partner
separately.

Since each year falls on it's own, 09 estimates are based on 08 tax
liabilities, etc.
 

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