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Old 06-30-2016, 10:23 PM
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LLC Partnership managed by another LLC

Background:

Company A LLC
Company A LLC is a Florida LLC. For tax purposes, this LLC is a Partnership. The company was formed in 2014 and at the time had 4 partners. Today the company has 3 partners.

Company A LLC current partners are as follows:
Company B LLC, a Wyoming LLC has 92.5% ownership
XXX LCC, a Florida LLC has 5% ownership
YYY LLC, a Florida LLC has 2.5% ownership
Company A provides IT staffing and Recruiting Services. Currently Joe has been responsible for all of the activities related to the company. We may have employees in the future, but currently Company A does not have any employees on payroll.

2016 will be the first profitable year for Company A. Profits are expected to be between $150k- $200k.

The current Manager of Company A is Company B LLC.

Company B LLC
Company B LLC is a Wyoming LLC and was formed a couple months earlier than Company A. It is essentially a holding company for Company A and any future companies that Joe may start or buy. For tax purposes, this LLC is currently a Disregarded Entity; however Joe is planning to convert it to an S Corp in the very near future (this week or next).

The current Manager of Company B LLC is Joe.

Questions
1. So far this year, Company A has not disbursed any income to its Partners. Should Company B;s conversion to an S Corp occur before and income is disbursed?
2. Should Joe be on Company A;s payroll, Company B;s payroll, or both to minimize Joe;s overall tax burden?
3. If the answer is to #2 is that Joe should just be paid out of Company B;s payroll, should his salary be based on his work as a Manager of Company B and also Company A or should his payroll be based on his IT Recruiting work that he is doing on behalf of Company A? Essentially, I;m trying to figure out what an acceptable salary is for Joe that will minimize Payroll taxes.


Last edited by Henry0823 : 06-30-2016 at 10:28 PM.


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Old 07-01-2016, 06:59 AM
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Quote:
Originally Posted by Henry0823 View Post
Background:

Company A LLC
Company A LLC is a Florida LLC. For tax purposes, this LLC is a Partnership. The company was formed in 2014 and at the time had 4 partners. Today the company has 3 partners.

Company A LLC current partners are as follows:
Company B LLC, a Wyoming LLC has 92.5% ownership
XXX LCC, a Florida LLC has 5% ownership
YYY LLC, a Florida LLC has 2.5% ownership
Company A provides IT staffing and Recruiting Services. Currently Joe has been responsible for all of the activities related to the company. We may have employees in the future, but currently Company A does not have any employees on payroll.

2016 will be the first profitable year for Company A. Profits are expected to be between $150k- $200k.

The current Manager of Company A is Company B LLC.

Company B LLC
Company B LLC is a Wyoming LLC and was formed a couple months earlier than Company A. It is essentially a holding company for Company A and any future companies that Joe may start or buy. For tax purposes, this LLC is currently a Disregarded Entity; however Joe is planning to convert it to an S Corp in the very near future (this week or next).

The current Manager of Company B LLC is Joe.

Questions
1. So far this year, Company A has not disbursed any income to its Partners. Should Company B;s conversion to an S Corp occur before and income is disbursed?
2. Should Joe be on Company A;s payroll, Company B;s payroll, or both to minimize Joe;s overall tax burden?
3. If the answer is to #2 is that Joe should just be paid out of Company B;s payroll, should his salary be based on his work as a Manager of Company B and also Company A or should his payroll be based on his IT Recruiting work that he is doing on behalf of Company A? Essentially, I;m trying to figure out what an acceptable salary is for Joe that will minimize Payroll taxes.
1. So far this year, Company A has not disbursed any income to its Partners. Should Company B;s conversion to an S Corp occur before and income is disbursed?=======>> Any individual or business entity, including those taxed as S corps, can be an owner, who is called a member, of a MMLLC.I guess LLC B?s conversion to an S corp should occur before distributive share from LLC A to avoid paying self employment taxes including estimated taxes on the distributive share of LLC A;After LLC B?s conversion to an S corp, the distributive share of the LLC A is reported on form1120S ; you can classify some of your income as salary and some as a distribution. You'll still be liable for self-employment taxes aka withholdings on the salary portion of your income on W2, but you'll just pay ordinary income tax on the distribution portion. Depending on how you divide your income, you could save a substantial amount of self-employment taxes just by converting to an S-corp.



2. Should Joe be on Company A;s payroll, Company B;s payroll, or both to minimize Joe;s overall tax burden?=====>>none of LLC A or LLC B?s . if speak to different accountants then I?ll receive different answers. Since you, than employee is also an owner of the LLC A and Bcalled a "member", however, the rules start to get complicated. Legally, a member of an LLC cannot receive a salary/wage on W2 as such from the LLC. There are only two ways a member can get cash out of the LLC: you can either take a "draw", or take a "distribution" of the LLC's profits. A "distribution" to an LLC member is like the dividend a corporation pays to a shareholder -;it is a partial return of the monies the member has invested in the LLC, and is based on the member's percentage of the LLC's net income or profit. When you convert the LLC B to an S corp then as said you as an owner/employee must put yourself on payroll


3. If the answer is to #2 is that Joe should just be paid out of Company B;s payroll, should his salary be based on his work as a Manager of Company B and also Company A or should his payroll be based on his IT Recruiting work that he is doing on behalf of Company A? Essentially, I;m trying to figure out what an acceptable salary is for Joe that will minimize Payroll taxes.==========>>as said previously; LLC A pays him his distributive ashore of the profit of LLC A. As an S corp shareholder/employee, S corp pays him compensation for services performed by him; an S corp must pay reasonable employee compensation subject to FICA taxes to a shareholder-employee in return for the services the employee provides before a distribution (not subject to FICA taxes) may be given to the shareholder-employee.



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Old 07-01-2016, 09:49 AM
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Thanks for your reply Wnhough. As I understand it, you suggest to immediately convert Company B to an S-Corp. Once the conversion is done, then Company A can disperse income to the partners. Once Company B has that money it can now start paying Joe, the owner, a wage via W2. Joe can minimize his payroll taxes and tax burden by getting a fair, but low wage and having more of the income from Company B come through as a distribution.

That all makes perfect sense. I have a couple more questions as follows:

1) How do I figure out what "reasonable employee compensation" would be for Joe?
2) If Joe must travel to earn income for Company A, will the travel expenses be paid by Company A or Company B? I assume those expenses will be paid by Company A, but just want to confirm.



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Old 07-01-2016, 03:57 PM
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Quote:
Originally Posted by Henry0823 View Post
Thanks for your reply Wnhough. As I understand it, you suggest to immediately convert Company B to an S-Corp. Once the conversion is done, then Company A can disperse income to the partners. Once Company B has that money it can now start paying Joe, the owner, a wage via W2. Joe can minimize his payroll taxes and tax burden by getting a fair, but low wage and having more of the income from Company B come through as a distribution.

That all makes perfect sense. I have a couple more questions as follows:

1) How do I figure out what "reasonable employee compensation" would be for Joe?========>.>. As far as I know no particular rule or method;however, it should be at leqast the prevailing rates of compensation for comparable positions in comparable businesses .wages should be close to those of the person with a similar position in a similar business. the prevailing general economic conditions (better economy, higher wageso on.

you need to make sure to maximize the amount of income classified as distributions is important because it results in significant FICA tax savings for the individual taxpayer as well as for the S corp. However, not classifying enough income as wages can be a huge problem. Unusually low wages when compared to distributions can draw unwanted IRS scrutiny and an audit. An unfavorable audit will likely result in some portion of the distributions being reclassified as earned income for federal income tax purposes, which results in a deficiency assessment (i.e., a tax bill), interest on those unpaid taxes, and IRS penalties.


2) If Joe must travel to earn income for Company A, will the travel expenses be paid by Company A or Company B? I assume those expenses will be paid by Company A, but just want to confirm.=====>>Then, it needs to be claimed by the paying biz, LLC A on its 1065.The irs is pretty generous about allowing deductions for using personal resources for business purposes as a member of a partnership. For example, if you travel out of town on partnership business, you can deduct the full cost of your plane ticket and hotel room and M&E exp. If you entertain a client over dinner or drinks, you can deduct up to 50 % of your expenses on your income tax returns. Since you are not an employee of the LLC A, LLC A can never report it on W2(as you do not receive a W2 from LLC A). you MAY use Sch E to report unreimbursed partnership expenses on your federal income tax return. you may use Sch E, line 28 in part II using ?UPE? (unreimbursed partnership expense) as the description, with column H being used for the amount (non-passive).

note;For LLC A, often a better way to handle it is to create an ?accountable plan? or some other reimbursement system to reimburse partners. you, as a partner, should submit an expense report within 60 days, and the LLC A should produce quarterly statements for you. In this type of plan, a provision to return ?excess reimbursement? has to be in place as well. Reimbursements are not counted as income to you, and reduce the income of the LLC A. But, missing a deadline results in the deduction being disallowed.



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Old 07-01-2016, 06:56 PM
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Thanks again for your response.

You indicate that I, as a partner, have unreimbursed expenses and can setup a accountable plan for reimbursing the partners of Company A. However, I am not a partner of Company A. Company B is a partner in Company A and I am an employee and owner of Company B. Does this fact change anything? Would I just submit an expense report to Company B and get reimbursed in my paycheck from Company B? If so, can company B simply invoice Company A for these costs or should a accountable plan still be setup to reimburse Company B?

This is crazy confusing



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Old 07-01-2016, 07:18 PM
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Quote:
Originally Posted by Henry0823 View Post
Thanks again for your response.

#1You indicate that I, as a partner, have unreimbursed expenses and can setup a accountable plan for reimbursing the partners of Company A. However, I am not a partner of Company A. Company B is a partner in Company A and I am an employee and owner of Company B.


#2Does this fact change anything? Would I just submit an expense report to Company B and get reimbursed in my paycheck from Company B? If so, can company B simply invoice Company A for these costs or should a accountable plan still be setup to reimburse Company B?

This is crazy confusing
#1You can not set up an acct plan but perhaps the LLC A

#2;as said as LLC A, NOT LLC B, paid you so you need to submit it to LLC A.Aslongas LLC B reimburses it then as you said, LLC B MAY invoice Company A for the costs but Only LLC A choose to apply an acct plan for the reimbursed biz related expenses



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