Discussion:LLC, SE Tax, and Bifurcation of Income

Wife Blended SE Tax 50% 9.10% 45% 8.48% 40% 7.86% 35% 7.24% 30% 6.62% 25% 6.00% 20% 5.38% 15% 4.76% 10% 4.14%

No SE tax would be a best case scenario and certainly the most aggressive tact. I'm not sure that having outside full time employment should having bearing on whether they are considered part-time "workers" of their LLC. At best--since both are involved with the operation of the business--it might be structured so that the husband is a general partner and wife is a limited partner. But again, passing the functional test of 1402 would be dificult. The proposed split of income--at some ratio--seems like a reasonable approach given the way the business would operate and each members partcular SS tax exposure. So let me guess, you'd go for a 99/1 split? ... :)

50/50 ownership does not mean that profits need to be split 50/50 in an LLC. Under an S-Corp you would be correct however.

Correct, the OA has not been drafted.

JR1,

Assume that the couple will work equal hours in the business, as I stated in the first post. Under such a scenario, what would be an appropriate split of profits if one member was "worth" more than the other, in terms of the skills they bring to the business. My conservative estimate would be that 60/40 to 70/30 would be appropriate, but, that 75/25 or less would be pushing it. Thouhgts.

Given the nature of this proposed business and the associated liabilities, a single member(with the husband as the owner) LLC does not make sense. As I have stated the wife would be involved with the business, and as such, if she were to fall into legal jeopardy, then her assets could be at risk--which means the husbands assets are also at risk. Essentially, by using the single member approach for this couple, asset protection does not exist if the wife were to get into trouble.

My thinking on this is that check the box and the resulting taxation of LLCs was done wholely by regulation. Sec 7701(a) defines corporation, partnership, etc. and there is a whole body of case law that sets forth the tests for determining where one falls based on the various attributes. It was definitely a trap for the unwary, but it was the law (actually, I think it still is). The the IRS publishes the Check the Box regs and changes everything.

I'm not saying the check the box regs ae unconstitutional, though I could articulate an argument, but rather that I beleive the IRS will have a lot of leeway in determining the tax consequences of LLC members since they created the tax formula in the first place.

Sometimes the client would rather pay $1,000 in tax than $5,000 in representation fees.

An LLC taxed as a partnership has gross income from the personal services of the members plus income from the sales of products - roughly 1/2 each. I come up with a ratio/% and report the resulting % of net profit from personal services as subject to SE tax and the portion of profit allocable to the sale of the products as not subject to SE tax.

As a result, I have sort of a middle of the road result - a little less aggressive than not paying any SE tax, but not "rolling over and playing dead" by paying SE tax on all of the profit.

This is all done after the fact, when the 1065 is prepared. All of the profits are drawn out by the owners throughout the year.

Thanks.

You can't file for SCORP election for 2006 since it is already too late for that unless it is a newly formed LLC within the 45 day thresh hold. SE TAXes are going have to be paid 1 way or another.

http://www.edzollars.com/PTWFICA.pdf

Utilizing guaranteed payments (if they are reasonable) is something I am going to explore and a method of reducing SE tax that is often cited. I'm not sure what recourse the IRS would have if you could adequatley demonstrate that your "payment" for services is commensurate with industry practice(however that is measured) and thus the only income that would be subject to SE tax. The explanation of this strategy as I have seen it written never touches upon the treatement of the portion of income that is not a guaranteed payment. In fact, one article I read simply says to take a "draw" of that cash as needed!

Things would be easier if my wife could be classified as a LP under the 1997 proposed regs, but given how we will run this, its not possible. But then again, proposed regs are just that...proposed! Seems like one big circuitious bungled tax conundrum!

Is nobody willing to take the position that a member with limited liability is a "limited partner?" That is contrary to the proposed reg, but if the Service doesn't like that, they should get off their asses and issue some actual regs.

Please let me know if my thoughts are not accurate: Guaranteed payments are deducted on page 1 of the 1065 - then the amount paid to the each partner as guaranteed payments is placed on each partner's k1 in box 4. They are then labeled as limited partners and the balance of the profit rolled over is not treated as se income in box 14. Am I correct - or am I way off track?

This works for those that are nonmanaging members. What about those that ARE general partners/managing members? Are you overriding the amount in box 14 with box 4 and adding a note as the other posting had stated she does?

We are working on one of these right now. A limited partner in the truest sense, however has personally guaranteed a $100,000 letter of credit for the partnership. He does not make any management decisions as is primarily there for capital contributions when needed. It is going to be hard to determine a guaranteed wage on someones that does not provide much in the way of services. However, due to his large partnership interest (78%), if we leave him as a general partner, he will have to pay tax on $350,000 of income (does not seem "fair" - do I sound like a kid or what) - what are your thoughts on this.

After reading the article - seems legit to determine a "fair" wage. Awaiting your responses.......