LLC Question Elect S Corp

[S T]

Have a new Biz LLC elected S Corp

I know that on an LLC for partnership the members can choose who receives income or loss,

but if the LLC elected S Corp - doesn't the profit or loss allocations have to be the same as the Member's percentages?

And, we also have to watch respective distributions?

Still treat as if it were an S Corp due to the election

So 3 members
#1 -24%
#2 - 24%
#3 - 52%

Sandy

[Koss]

S Corp

In general, you are correct. An S corp cannot allocate profits and losses, or distributions, in a manner that is mathematically inconsistent with the ownership shares.

There may be some arcane exception or workaround that I am not familiar with.

If one or more shareholders is actively working in the business, then you can, to a certain extent, lawfully manipulate profit and loss by paying a larger or smaller salary to one or more shareholders. Of course you have to be careful to avoid a situation where a shareholder who is actively working in the business has no salary at all or a salary that is unrealistically low.

But if you have four shareholders who each have 25%, and there's profit that they don't want to split evenly, then part of it could be paid as a salary bonus to a shareholder who works in the business. But then it becomes subject to FICA...

BMK

[JohnH]

Another way to facilitate unequal distributions when you have a mix of active/employee shareholders and passive/non-employee shareholders is to use creative structuring of SEP plans. It is useful when you want to pass additional profits to the active shareholders, but useless when trying to work it in the opposite direction.

[S T]

Thanks for the info BMK and JohnH - Your suggestions, I don't even want to go there with this T/P - I am picking up pieces of a "DIY/er" and having to make so many corrections and phone calls, they only opened in Oct 2011. For only approx 3 months, they have received IRS notices, already for wrong form filing, and Texas for not filing reports due.

And they did not file the 2553 S-election, however, I will give them credit they did file the 8832 form.

I am just going to give them the basics and that is what I want them to do for now, we will take another look at some of your suggestions later.

Sandy