An LLC would be a good idea, and the consultants would pay a monthly fee to the LLC and the the LLC would pay each shareholder for their expenses. The problem I see is who is going to administer the expenses, and what role does each contractor play in the LLC.
If you set up an LLC, each contractor should be paid as a contractor from the LLC, through a 1099.
Your answer was not very helpful, which is why I did not accept it. From the way you phrased the anwer, I suspect that you didn't understand the structure. I will try to clarify and ask my question another way.
Several independent consultants want to gain the benefits of working in a larger group (greater breadth of offerings to customers, cross-marketing opportunities, and to share marketing and administration costs). Each of the consultants is now a sole proprietorship or an LLC. We want to jointly create another company, of which we 1) we all would be owners and 2) under which we all would be the consultants offering services. We have been thinking of this as a consulting consortium, perhaps like a co-op or guild. We do not envision at this time a structure where only some of us would be owners, and the rest contractors. Everyone will be both an owner of the new entity and a consultant providing services to clients under the new entity. Please note, the consulting services are not provided to the new entity. The consulting services are provided to other third parties, marketed under the name of the new entity.
As I tried to explain above, we do not want to combine our revenue streams, but keep those flowing directly to our own companies. Therefore, the new entity under which we would jointly market would only have expenses and no revenues. The new entity would allocate costs back to each of us member (consultants) per the terms of an Operating Agreement. We also would have a board or decision-making committee to approve types of expenditures and annual budget, with maybe one of us acting as a managing partner to act on behalf of the LLC. We would likely hire a full or part-time manager, and perhaps outsource certain services like tax preparation and advertising.
When I asked about pitfalls, I was wondering about tax issues and liability in particular. All of us will want to be able to off-set the costs of the new entity against the revenues that we make independently- is this possible. And what thought do you see around liability with this structure? are there any other ideas?
If this is not in your area of experience, please defer this to another expert. Thanks!
I understood the question, what I am suggesting is this:
if you create an llc named "Contractor group" and all shareholders put in $1000 each for everyones administration expenses, each shareholder could deduct from his taxes his expenses as it relates to the LLC. Each shareholder would wrok independently from the LLC and receive income on their own company, nothing goes into the LLC.
An LLC, allows each member to deduct expenses, profits and losses of the LLC on their own company.
I have created numerous of these types of structures, the tax benefits because it is an LLC are similar to an S corp., as each shareholder can deduct the moneis put into the LLC and taken out on their own income tax return.
My only issue is who will be in charge of distribution out of the LLC, are you going to allow each shareholder to be able to have access to the funds of the entire LLC? That is my issue.
Instead of letting individual members control the distribution of funds, we would agree to establish an operating committee, who would manage the funds of the LLC at a high level. For example, after each member put in funds, there would then be operating funds for the new LLC. The spending of those funds would be set by the operating committee- a annual buget would be establishd as well as the spending authority level for the business manager. It may also be necessary for the operating committee to appoint one of its own to act as a general manager ("Managing Partner"), to give more specific direction to the business manager. We would likely agree on a fee to be paid to the person from the operating committee, who took this role. So the governance would be: Board >>> Operating committee>>> managing partner >>> business manager.
Any thoughts on liability? [note, I will be accepting your advice on the next round, but wanted to reply to your note]
That would seem fair, however, you will need a very detailed and explicit operating agreement, on how and when distributions are made, the elections of members and the general manager, the exact roles and duties of the general manager, also what the process is to add new members and how to remove members.
The framework is their, but future problems always arise, especially when one contractor beleives that funds should be distributed one way and others decide against that person, a natural conflict arises.
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