LLC (Partnership) Tax Questions


D

dickens

Hello,

Myself and two other business partners have formed an LLC. All three
of us will be managing members splitting all profits and losses
equally. We have no employees. I've researched a ton on the net and
haven't been able to come up with concrete answers for these
questions:
1.) Do LLC members have to draw a regular salary throughout the year
(not talking about guaranteed payments or lease/ loan payments to
members from the LLC), just a simple salary like you get from your 9-5
job? If so, I hear the term "reasonable salary" - please define.

2.) If #1 is yes you do have to draw a salary, is this regular salary
taxed the same as "Pass Through" Profits/Losses distributed at the
end of the fiscal year, meaning that both regular salary and
distributions are taxed only by self employment taxes? If #2 is yes
they are taxed the same why would you have to take a salary if the tax
end results in paying the same amount of taxes.

3.) If LLC's don't have to pay a regular salary to it's members
and if all three members of the LLC perform duties which could qualify
for guaranteed payments, do we absolutely have pay distributed payments
or can we elect not to receive distributed payments and elect to take
profits/losses solely during year end distribution of profits/losses.

(Please keep in mind this question is under the scope of federal taxes,
I know states have their own little caveat's here. I am going to
also consult a tax consultant on this issue as well; I am just trying
to get as much info as possible before inevitably hiring a CPA. FYI I
also am aware that salaries go in to operating expenses and therefore
lower net income so I see the advantages of actually paying a salary, I
just want to know what is mandatory.).

Thanks,

Joe
 
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A

Arthur Kamlet

Myself and two other business partners have formed an LLC. All three
of us will be managing members splitting all profits and losses
equally. We have no employees. I've researched a ton on the net and
haven't been able to come up with concrete answers for these
questions:
1.) Do LLC members have to draw a regular salary throughout the year
(not talking about guaranteed payments or lease/ loan payments to
members from the LLC), just a simple salary like you get from your 9-5
job? If so, I hear the term "reasonable salary" - please define.



I will assume you will treat the LLC as a partnership for tax
purposes, and not as a corporation?


In which case, the concept of salary simply doesn't arise.


The partnership reports its income and its expenses. The "draw"
taken by the partners is not treated as salary or expense of the
partnership. It reduces the basis of the members and unless the
basis is reduced to zero, there is no income to be recognized.



The partbers might also wish to contribute more to their basis.
That's not deductible either.



2.) If #1 is yes you do have to draw a salary, is this regular salary
taxed the same as "Pass Through" Profits/Losses distributed at the
end of the fiscal year, meaning that both regular salary and
distributions are taxed only by self employment taxes? If #2 is yes
they are taxed the same why would you have to take a salary if the tax
end results in paying the same amount of taxes.





You might be thinking of a corporation?

3.) If LLC's don't have to pay a regular salary to it's members
and if all three members of the LLC perform duties which could qualify
for guaranteed payments, do we absolutely have pay distributed payments
or can we elect not to receive distributed payments and elect to take
profits/losses solely during year end distribution of profits/losses.



The profit, the difference between income and expenses, is
reported to each member on a K-1.
 
D

dickens

Thanks for the information Art! See Below...




Arthur said:
I will assume you will treat the LLC as a partnership for tax
purposes, and not as a corporation?
Yes my LLC will be taxed as a Partnership.
In which case, the concept of salary simply doesn't arise.
So just to verify what you said basically the distributed Profit/Loss
is the "salary" when electing to be taxed as a partnership.
The partnership reports its income and its expenses. The "draw"
taken by the partners is not treated as salary or expense of the
partnership. It reduces the basis of the members and unless the
basis is reduced to zero, there is no income to be recognized.
Can you define basis? I am having a hard time finding a clear
definition of the term in this context. Is it Equity in the business?
The partbers might also wish to contribute more to their basis.
That's not deductible either.
Once again what is basis (sorry i'm not versed in accounting terms)?
Are you trying to say instead of taking all of the distribution of
profits, keep some in the company for future use? It's my
understanding whether you elect to take the distribution or keep it in
the company that you have to pay self employments either way.
You might be thinking of a corporation?
We established the only "draw" is at the end of the year during
distributions of Profits/Losses.

Do you know much about guaranteed payments? I've researched examples
where members of the LLC (taxed as partnerships) performing employee
like duties can receive these mentioned payments.
 
P

Paul Thomas

dickens said:
Can you define basis? I am having a hard time finding a clear
definition of the term in this context. Is it Equity in the business?


Basis is what the owner(s) have put in the business.

It's basically:

Your initial contributions
+ profits
- losses
+ additional contributions
- distributions



There are at times, two types of basis, internal (what the entity knows
about) and external (what you know about).

The entity should track internal basis (shown above). You would have an
external basis that differs if you bought the interests from another owner
(ie: the company wasn't part of the transaction). In that case, just swap
"initial contribution" with "purchase price".
 
S

Shagnasty

LLC members should not get a 'salary' or receive W-ws and draws are not
subject to self employment tax.
Unlike 'draws', guaranteed payments to LLC members are considered
self-employment income and subject to S.E. tax.
Although there is no rule that I know of, there may be one later and it may
be applied retroactively, so to deal with the 'reasonable salary'
equivalent, guaranteed payments should be made to members. The remaining
profits should be added to the members' basis and their draws should be
deducted from their basis.
 
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P

Paul Thomas

Shagnasty said:
Although there is no rule that I know of, there may be one later and it
may
be applied retroactively, so to deal with the 'reasonable salary'
equivalent, guaranteed payments should be made to members.


No. I can't agree with this at all.
 
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