How do YOU get paid?!?! - From your LLC/Entity

[Lucas Pfaff]

I'm a bit stuck in trying to determine the best way for an investor to get compensated for their efforts in an LLC.

I am part of a 2 member LLC in Philadelphia, PA. Originally, both members were operating under an understanding that responsibilities would be split 50/50 but at this point in time, and for the foreseeable future, I have taken on 100% of the operational responsibilities.

Both members have agreed that I need to be compensated for time and efforts but we are stuck with the best method tax wise and operationally to do so.

Here's the (3) options we currently have...

1) Monthly withdrawals directly from the business account

2) Monthly checks - I believe this would result in me being treated as a 1099 employee.

3) Have a portion of my monthly expenses/bills paid by the LLC. This would include qualifying expenses such as cell phone, office rent, car insurance, and internet.

Aside from the actual method of payment, there is also the discussion of amount. Obviously, any payment I receive would reduce the net profit and therefore market value of the property. The effect on market value isn't a major concern at this point in time. We fully expect to hold all the properties under this LLC for at least 5-7 years.

SO....I'm trying to determine two things...the first is the best method for paying me. This seems to be more of a tax issue than anything. The second issue is determining a fair wage. Our initial thought is to compensate me roughly on the level of of a property manager, i.e. a flat rate of ~12% gross rents.

Any and all thoughts/advice are welcome!

BTW - If this question should be placed in another category please let me know. I'm not certain this is the most appropriate category.

[Justin B.]

Just based on what you typed, I would recommend a guaranteed payment.  Do a lot of research and contact your CPA for all the exact details.

Basically, if you do a guaranteed payment, the person receiving the payment is responsible for self-employment taxes which means monthly or quarterly payments to the IRS by the individual may be needed. Since the LLC is just writing a check (and again this is simplified for the purpose of this post) the amount is just an expense to the business and all the burden of taxes falls on the individual.

If you do a distribution, this isn't taxable but instead reduces your capital by as much in the LLC (which if you are the only one taking distributions is probably not what you want). Also distributions are usually based around P&L and since what you are describing is payment for services (regardless of income/loss), if the IRS ever audited you they would almost certainly re-classify them as guaranteed payments and then back taxes and penalties come into play.

You also have the option of setting yourself up to do a real payroll, draw a salary, have the company withhold taxes, etc, but that's a headache in the business that I know I wouldn't want until absolutely necessary.