Odd Question

c4yrslf12

c4yrslf12

Level 3
Dec 2, 2012
759
7
0
USA
So a partner and I are going to go ahead with a venture and I can't seem to get the setup in my head right: someone help?

We will need to setup an LLC and we'll be sharing all expenses down the middle, 100%. BUT, we'll be paying ourselves different salaries/bonuses. What's the most efficient? If we go LLC we'll owe self-employment tax. If we go S-Corp, we have to split our end year distribution 50/50, although it wasn't earned so...

Can we have an umbrella LLC with each our own LLC dba the main LLC?

My head is spinning. Our accountant didn't even know...(she's probably fired.)
 


you can pay a salary to the higher-paid of the two that comes off the top (pre- "profit" distribution), though it will be subject to the self-employment tax, but some portion of your income will anyways if you are doing your S-chapter correctly, so that shouldn't really be a factor. Not sure why you think the Sub-S setup requires equal distributions, it doesn't, that is just the default rules.You are welcome to change them by contract to anything you want, they really only matter if the business failed, there was litigation, and you two were winding up the biz.

If it is a flat-rate amount that is different between your checks each month, probably easiest to do that as a separate salary for the higher-paid of you two. If the difference in your checks varies or is by a %, its often easier to have one identical S-distro for both of you, then an additional second S-distro to him at the end of the month. There are a dozen different ways to do it depending on your goals, and none of them require multiple LLCs/umbrellas, etc. Just be sure to document in a signed agreement (e.g. an employment agreement, a profit distribution agreement, etc) how it will be calculated.

Oh, and fire your accountant. Partners have different take-home pay in lots of businesses, your accountant shouldn't be struggling with something simple like that.
 
mont7071 said:
you can pay a salary to the higher-paid of the two that comes off the top (pre- "profit" distribution), though it will be subject to the self-employment tax, but some portion of your income will anyways if you are doing your S-chapter correctly, so that shouldn't really be a factor. Not sure why you think the Sub-S setup requires equal distributions, it doesn't, that is just the default rules.You are welcome to change them by contract to anything you want, they really only matter if the business failed, there was litigation, and you two were winding up the biz.

If it is a flat-rate amount that is different between your checks each month, probably easiest to do that as a separate salary for the higher-paid of you two. If the difference in your checks varies or is by a %, its often easier to have one identical S-distro for both of you, then an additional second S-distro to him at the end of the month. There are a dozen different ways to do it depending on your goals, and none of them require multiple LLCs/umbrellas, etc. Just be sure to document in a signed agreement (e.g. an employment agreement, a profit distribution agreement, etc) how it will be calculated.

Oh, and fire your accountant. Partners have different take-home pay in lots of businesses, your accountant shouldn't be struggling with something simple like that.
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We were told we could salary ourselves however we wanted, and have "extra" distributions throughout the year as "Commissions", but we still had to split the year-end distribution 50/50. Is the contract change just listed in our business minutes?
 
c4yrslf12 said:
We were told we could salary ourselves however we wanted, and have "extra" distributions throughout the year as "Commissions", but we still had to split the year-end distribution 50/50. Is the contract change just listed in our business minutes?
Click to expand...

Listen to mont, if I'd trust anyone's business decisions on this forum it is him and maybe a few other big ballers on here like bigwill.
 
whatever you do spell out all the details of your partnership in writting. Expectations, Salaries, divorce, death, or you plain old get sick of it. Should there be a first right of refusal? The list goes on and on. Get it in writing and then both of you sign it and then draw a circle, lick your thumb's and press down your thumb in the circle. Now you guys have a rock solid contract (with DNA), so when one of you turns into a douchebag the other has some options. This partnership agreement is far more important than your LLC (both are critical). Skip it (cuz you're biz wont come in between friendship) and you're as good as fucked, before you even get started.



PS.. Cut him out now!!! That is unless he is putting up the startup capitol.
 
We are equally invested, capital/time/knowledge/expectations/client. we've been working together for years, but this is our first true joint venture. we've been mutually exclusive til now.

thanks for the advice fellas.
 
c4yrslf12 said:
We are equally invested, capital/time/knowledge/expectations/client. we've been working together for years, but this is our first true joint venture. we've been mutually exclusive til now.

thanks for the advice fellas.
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Don't let me see you a year from now asking hiw to get rid of a deadbeat partner. Get that partnership agreement done asap
 
Mate, you can structure an agreement however you like, at whatever percentages you care to, but it needs to be in writing from the get-go.

Ignore the expenses part- all businesses pay their COGS and Expenses off the top, so division of costs really is immaterial. It's what's left that matters. If one of you is more valuable skills-wise to the team and gets a bigger salary, fine- that's an expense line, and doesn't affect the issue. If it's a question of sales volume, and one of you brings in more bacon, that should be handled by commissions as they occur, not by "distribution" or "bonuses".

Once again, it's what's left that matters, and that can be handled differently with different structures, but they all work basically the same way. If you do it as a Corp or SubS Corp or as an LLC or LP, distribution's all based on "Shares", and that needs to be set up in the Charter & Bylaws or Operating/Membership Agreement from the beginning or adjusted by amendment as required over the life of the business.

If all you're concerned about is division of net earnings, that's easy- just have one of you hold more shares than the other. But (and here's where it get's interesting) you are concerned about CONTROL, and want a 50/50 split for that reason...

Simple- Designate a certain portion of your issued shares "Non-Voting", and make sure they are issued correctly. Example, you could issue 1000 shares of stock, 800 Class A common, and 200 Class B preferred (non-voting) with equal valuation. You each hold 400 common, partner A holds 150 preferred, Partner B holds 50. Partner A participates in profit at 55%, Partner B at 45%, but you both have equal votes as regards control.

One caveat as regards 50/50 control though- you are set up for a potential deadlock that can destroy a business. You should designate a trusted "tie-breaker" to hold a few shares- this should be a third party that can view a dispute impartially and act for the good of the business. I've always used my business lawyer for that, and they usually will (for a fee).

Now there are fine variations of the above scenario, and the Tax implications of the different structures are a different story, and one I wouldn't dare give advice on- You should consult a good Tax/Business Attorney in addition to a competent accountant who really understands Company structures. Call your local Bar Association for a referral if you don't have a contact.

I strongly urge you to take these steps- it sounds like you have a nice business and friendship going here. Fuck this up, and you will shortly have neither.

Good Luck Bro.
 
c4yrslf12 said:
Can we have an umbrella LLC with each our own LLC dba the main LLC?
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create an umbrella LLC with 2 partners in it, those partners being 2 s-corps, one for each of you. you'll get the benefits of both LLC & S-corp structures.
 
drave said:
create an umbrella LLC with 2 partners in it, those partners being 2 s-corps, one for each of you. you'll get the benefits of both LLC & S-corp structures.
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images
 
drave said:
create an umbrella LLC with 2 partners in it, those partners being 2 s-corps, one for each of you. you'll get the benefits of both LLC & S-corp structures.
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An LLC can elect Sub-S status itself, you don't need the extra level there if you are starting from scratch. Form 2553 FTW
 
mont7071 said:
An LLC can elect Sub-S status itself, you don't need the extra level there if you are starting from scratch.
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this didn't used to be the case; previously an s-corp could only be formed by electing s-status from a C corp form. if now the sub-s status you mentioned above still retains all the liability & profit distribution flexibility of an LLC, then clearly that's the way to go.

when i set up my structure, i already had my own S, while parnering up with someone else on a new venture. we formed the umbrella LLC so the venture would have the LLC benefits not afforded by the S.
 
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