LLC Distribution Issue

[bbrownatl]

Just trying to navigate a distribution situation with a new LLC client. Two guys formed the LLC in Feb.09 with 50/50 ownership. One left his day job in April 09 and began work for the LLC. The other is leaving his day job effective 12/13/09 and will start on 1/1/2010 with the LLC. Now the issue, for 2009, the LLC is estimating a profit of approx. $90K. They want the one guy who started in April to receive the full allocation of income. Normally for an LLC this would not be a problem. However, I recently discussed with them the consideration of a (late) S-Corp election and thus if it is effective for April 09 then they would need to split the profit 50/50 given the S-Corp ownership. Again, it gets back to the tradeoff with an S-Corp, save on self employment taxes but lose the flexibility with income allocation and retirement benefits. Any thoughts to the circumstance? I’m considering now not advocating the S-Corp election.

As always thanks for your input.

Brian

[AuditorTurnedGood]

I suppose it depends on what the LLC does and how much $$$ they have wrapped up in it. If it's a personal service kind of thing with little in the way of assets, chances are your reasonable comp in the S-Corp would be comparable to what you'd end up with for G-payments to the LLC members for services rendered, subject to SE tax.

At least with LLC, you have flexible distribution rules, and don't have to deal with payroll tax filings.

ATG

[BOB W]

I would not go the SubS route until 2010 when both are working full time.

[bbrownatl]

Bob, so they would need to file Form 1065 as a partnership for 2009 then in 2010 file Form 8832, the "check the box", to become a C. Then file Form 2553 and have the effective date as 1/1/2010. Right scenario?

Thanks again.

[Lion]

Gp

Don't forget about guaranteed payments (or salary, if they were an S) prior to splitting the profits 50/50 or whatever is decided in the partnership.

Since you need to stick to their ownership percentage in an S, why would you want to make it effective in 2009? If an S in 2010, you can make adjustments via salary to take into account differing amounts of time or results before allocating profits. What would be an appropriate industry salary? Have one or both contributed a lot of capital that's resulting in the profits, maybe equipment for manufacturing? Will there really be much of a difference in taxes?

[Lion]

Advance

If they're already organized within a state as an entity such as an LLC, they file only the 2553 and can file it in advance, putting the date they want it to be effective, maybe up to 90 days, check the instructions.

[ChEAr$]

If they're already organized within a state as an entity such as an LLC, they file only the 2553 and can file it in advance, putting the date they want it to be effective, maybe up to 90 days, check the instructions.

Regardless of the fact that the LLC files as a default partnership, you must look to the
operating agreement in place, drawn up when the LLC was formed and registered.
Assuming all the i's were dotted and t's crossed, it will spell out distribution of the profits.
Just like a written partnership agreement, if some of the profits before allowance for
salaries were to be allocated to the managing or working members, then those are the
guaranteed payments and anything left over, plus or minus, is split as profit or loss on
the K-1's.

If the operating agreement is deficient in this respect it should be amended posthaste.

[Gretel]

Regardless of the fact that the LLC files as a default partnership, you must look to the
operating agreement in place, drawn up when the LLC was formed and registered.
Assuming all the i's were dotted and t's crossed, it will spell out distribution of the profits.
Just like a written partnership agreement, if some of the profits before allowance for
salaries were to be allocated to the managing or working members, then those are the
guaranteed payments and anything left over, plus or minus, is split as profit or loss on
the K-1's.

If the operating agreement is deficient in this respect it should be amended posthaste.

Yes, I agree. In addition, if you have unequal distributions after guaranteed payments, the Operating Agreement needs to have certain language for the economic effect and two sets of books need to be kept, one using FMV.

[BOB W]

Bob, so they would need to file Form 1065 as a partnership for 2009 then in 2010 file Form 8832, the "check the box", to become a C. Then file Form 2553 and have the effective date as 1/1/2010. Right scenario?

Thanks again.

Too many non-SubS issues have taken place in 2009 to consider a switch now. If an SCorp is the way you want to go> 2010 is the year to start clean.

Why complicate 2009??????