I'm trying to form a business in CT. There will be only 2 people involved with the LLC, me, and a friend from another State. For the first few years I'll be keeping most (if not all) of the profits. What is the best way to set up this company so that my friend will not have to pay any taxes or have too much paper work.
I believe that I want to make them a member and not an employee.
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I believe that you need to meet with a local tax professional who is well versed in LLC operation BEFORE you do anything. There is no prohibition against him being either, but there are profound consequences to either choice. There is also no prohibition against him being an owner but NOT getting any of the profits or losses from operations - it just needs to be spelled out FIRST.
You need someone experienced in tax concepts that can help you draft the operating agreement, or an addendum to it, that outlines how profits and losses will be allocated. An LLC, like a partnership, can be very flexible as long as everything is properly spelled out.
NOTE that this may not preclude the LLC from paying some level of tax on behalf of the nonresident member - Maryland is one such state. This may be circumvented if the nonresident is getting none of the profits.
NOTE also that even without profits the nonresident member may still need to file a nonresident tax return.
As I said, the issue is complex and requires assessment by a professional well versed in LLC taxation.
At the risk or ruffling feathers with some dear friends on this NG - I would suggest that you NOT have this discussion with your attorney, at least not at first. In my experience lawyers, with the best of intentions, will tell you what is absolutely legal to do while having an insufficient understanding of what is BETTER to do.
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