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Posted by valemike on November 10, 2006, 5:29 pm
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I am a member of an LLC which has four members. We also have
4 additional fulltime employees. Each member equally owns
25% of the LLC.
We used to only take draws, but this past year, we instead
gave ourselves 'salaries' each month. Anything excess profit
would then be a member draw each month.
Is it perfectly legal with the IRS that a certain LLC member
was paid a significantly higher salary than the others?
Basically, what i'm asking is: Is it okay for some LLC
members to get a higher salary than other equal members?
The only equal draws at the end of it all is just the excess
profit that remains.
Thanks,
Mike
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Posted by John H. Fisher on November 11, 2006, 10:35 am
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valemike@yahoo.com wrote:
> I am a member of an LLC which has four members. We also have
> 4 additional fulltime employees. Each member equally owns
> 25% of the LLC.
>
> We used to only take draws, but this past year, we instead
> gave ourselves 'salaries' each month. Anything excess profit
> would then be a member draw each month.
>
> Is it perfectly legal with the IRS that a certain LLC member
> was paid a significantly higher salary than the others?
>
> Basically, what i'm asking is: Is it okay for some LLC
> members to get a higher salary than other equal members?
> The only equal draws at the end of it all is just the excess
> profit that remains.
Certainly, BUT the likelihood is that you should have been
paying yourselves wages from the gitgo if you were organized
as a corporation!! Under a partnership agreement,
guaranteed payments could be set up to accomodate a higher
"take" on the part of individual partners.
If you are partners, wages/salary would not be the proper
form.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Katie on November 12, 2006, 3:44 pm
Please log in for more thread options valemike@yahoo.com wrote:
> I am a member of an LLC which has four members. We also have
> 4 additional fulltime employees. Each member equally owns
> 25% of the LLC.
>
> We used to only take draws, but this past year, we instead
> gave ourselves 'salaries' each month. Anything excess profit
> would then be a member draw each month.
>
> Is it perfectly legal with the IRS that a certain LLC member
> was paid a significantly higher salary than the others?
>
> Basically, what i'm asking is: Is it okay for some LLC
> members to get a higher salary than other equal members?
> The only equal draws at the end of it all is just the excess
> profit that remains.
Well, yes, but assuming your LLC has not elected to be taxed
as a C corporation, the LLC members cannot be employees.
The LLC has to follow the partnership rules. The members
will be taxable on their distributive shares of the
partnership's income (BEFORE their "draws"), regardless of
how much cash they actually took out of it. If a member
took more cash than his or her distributive share of income,
the excess reduces his or her basis in the LLC.
The correct way to handle this in a partnership is to make
"guaranteed payments" to the members based on the
compensation they would receive if they were employees. So
member A might work half time or at a job that would earn a
lower wage rate and get a $50,000 guaranteed payment, while
member B works full time or has skills that would be highly
compensated, and gets a $100,000 guaranteed payment. The
guaranteed payments are subtracted from the partnership's
income, and the remainder is divided among the partners in
accordance with their P&L interests.
So, suppose you have four members, A, B, C, and D, each with
a 25% P&L interest in the LLC. The net income of the
partnership, after deducting other expenses (such as
employees' salaries), is $550,000. A gets a $50,000
guaranteed payment; B gets $100,000 guaranteed payment; C
and D do not perform services for the LLC. A's K-1 shows
$100,000 (550,000-150,000 = 400,000 x 25%) distributable
income, plus $50,000 guaranteed payment. B's shows $100,000
distributive share plus $100,000 guaranteed payment. C and
D each get $100,000 distributive share.
Katie in San Diego
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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