Myself and two other business partners have formed an LLC. All three
of us will be managing members splitting all profits and losses
equally. We have no employees. I've researched a ton on the net and
haven't been able to come up with concrete answers for these
1.) Do LLC members have to draw a regular salary throughout the year
(not talking about guaranteed payments or lease/ loan payments to
members from the LLC), just a simple salary like you get from your 9-5
job? If so, I hear the term "reasonable salary" - please define.
2.) If #1 is yes you do have to draw a salary, is this regular salary
taxed the same as "Pass Through" Profits/Losses distributed at the
end of the fiscal year, meaning that both regular salary and
distributions are taxed only by self employment taxes? If #2 is yes
they are taxed the same why would you have to take a salary if the tax
end results in paying the same amount of taxes.
3.) If LLC's don't have to pay a regular salary to it's members
and if all three members of the LLC perform duties which could qualify
for guaranteed payments, do we absolutely have pay distributed payments
or can we elect not to receive distributed payments and elect to take
profits/losses solely during year end distribution of profits/losses.
(Please keep in mind this question is under the scope of federal taxes,
I know states have their own little caveat's here. I am going to
also consult a tax consultant on this issue as well; I am just trying
to get as much info as possible before inevitably hiring a CPA. FYI I
also am aware that salaries go in to operating expenses and therefore
lower net income so I see the advantages of actually paying a salary, I
just want to know what is mandatory.).
For an LLC that is taxed as a partnership, the answer is no. In fact they
don't draw any salary.
#1 is no, so rephrase your question.
The term "guaranteed payments" are not guaranteed, nor do they have to be
You can, by the decision of the LLC members, not take any distributions
during the year.
Guaranteed payments are the method to pay out different amounts to the
members/partners for differing work. Since profits are generally split
according to the % ownership or by the partnership agreement, the only
method available to sift some payments to other partners/members is through
Distributions of profits are not required by federal laws (and I suspect
state laws are lax on any requirements as well). The LLC agreement
presides, if it addresses it at all. Some percentage should be paid out to
help defray the tax hit on the profits, otherwise you could easily put a
financial strain on a weak partner who doesn't have the cash flow to absorb
the tax burden on his/her profits. Not that you want to be mean like
that....... I've seen it done till the weak partner sells off their
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