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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9181
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have an LLC with an S-corp election. Currently Distributing

Resolved Question:

I have an LLC with an S-corp election. Currently Distributing products through a company as a 1099, which commissions are paid to my Company. I have an opportunity to buy 10% ownership in the company, I am Distributing products for.

Should I invest with my personal assets & own this 10% outside my company?

or invest with my Business Assets & run everything through my Company?
Submitted: 3 years ago.
Category: Finance
Expert:  Lane replied 3 years ago.

NPVAdvisor :

Hi,

NPVAdvisor :

There are some things that, as per IRS rues, an S-corp can't do (you'll find this in the instructions for form 2553 S-Corp election)

NPVAdvisor :


















A.Have more than 100 shareholders.
B.Have as a shareholder a person who is not an individual (except an estate or certain trusts).
C.Have a nonresident alien as a shareholder.
D.Have more than one class of stock.
NPVAdvisor :

SO, the BASIC answer just from a legal perspective is that it's actually a prohibited ownership

Customer:

The Company I am buying 10% ownership into is an LLC only

NPVAdvisor :

And that, from a tax standpoint, may not matter, anyway

NPVAdvisor :

as your s-corp is a passthrough (everything flows to your personal 1040 as you know)

Customer:

So, I should pay for the 10% ownership of the Company through me personally, not through my company.

NPVAdvisor :

Only C-corps and IRRevocable trusts have their own tax rates and brackets, and therefore pay taxes at a differential to their owners

Customer:

then I will just receive a K-1

NPVAdvisor :

S-corps, (through that K-1), partnerships, LLCs that aren't s-corp elected and Sole proprietorships ... there's not tax differential... it's you

NPVAdvisor :

Yep

NPVAdvisor :

THe LLC membership will give you the same asset protection from liabilities, debts lawsuits, etc as the s-corp does

NPVAdvisor :

so, since both are passthroughs ... it all ends up on the 1040

Customer:

I guess I was hoping I could run everything through my company & take advantage of not paying self employment tax

NPVAdvisor :

Hte only difference at all (and it may be negligible) ... beat me to it

NPVAdvisor :

depending on the number that IS the only difference

NPVAdvisor :

since it's an LLC, you CAN do it

Customer:

Give me a Summary. How should I go about paying for the 10% ownership in your opinion

NPVAdvisor :

Thats a financial question .... IF you think it's a sure thing and you can get favorable financing, you're real return WILL always be maximized

NPVAdvisor :

but y the amse token ... if it loses money, the leverage maximizes the loss

NPVAdvisor :

The part that saves you the SE tax is having the S-corp being a 10$ member in the LLC (thats a titling issue)

NPVAdvisor :

10%

NPVAdvisor :

but since everything flows through to you which every way gives you the best interest rate (having the S-corp take out a loan or taking it out personally) is what will make the difference in your net return ... it all flows to yur botXXXXX XXXXXne

Customer:

sorry to keep this lingering on. Which ever way I go, owning this 10% of the company personally, with personal funds. Or running it through my business

NPVAdvisor :

(sorry for the typos) If I invest $1000 and make $10 I make 10$ ... If i invest 100 of loaned money (given that I have to subtract out a little interest cost) my real return is MUCH higher ... (and my loss could be greater) that what leverage does

Customer:

will not make a difference from a tax standpoint

NPVAdvisor :

Yes, you'll just have the llc sell a 10% to either you OR the S-corp

NPVAdvisor :

that's right OTHER than saving some on SELF employment tax .... that extra cash flow that comes in from the LLC will reasonable be all dividend

NPVAdvisor :

if nyou inveswt personally, it's self employment income ... the questions is, how much does than really save you

Customer:

that is the question. But I still have to pay myself a reasonable salary with the s-corp election.

NPVAdvisor :

Right, but that salary's already there ... and when your s-corp makes other investments, especially if you don't have management responsibilities there... that's all just investment income (no reason to raise you salary)

Customer:

It appears I will put the 10% ownership under me personally, outside my company?

NPVAdvisor :

no

NPVAdvisor :

I think the opposite....

NPVAdvisor :

If the S- corp makes an invest in the c-corp ... then

NPVAdvisor :

the extra money that flows through to you as an owner of the S-corp is dividend

NPVAdvisor :

sorry ... S-Corp invests in LLC

NPVAdvisor :

that doesn't require that you raise your salary - which would require more SS (both side owner and employee) it is just extra investment income flowing into the s-corp and to you as dividends

NPVAdvisor :

so SE tax on dividends

NPVAdvisor :

If you become a 10% member in the LLC, that's all self employment income off the K-1

Customer:

I run QB now. How will the IRS view the Distribution from the investment & not see it as company growth?

NPVAdvisor :

investment income

NPVAdvisor :

your s-corp have made an investment in another company

Customer:

so I will have to make a new list in the chart of accounts as "Investment Income"?

NPVAdvisor :

Yes

NPVAdvisor :

question: Is there ny expectation of you in being this member or is it all just pure investment

NPVAdvisor :

any responsibilities in the LLC?

Customer:

Purely a silent Partner, No managing responsibilities. & how do I Get the Money out of QB?

Customer:

as for as what Account for the Investment

NPVAdvisor :

think of it this way ... If your s-corp went out and bought a bond that paid 4% interest, that's just extra income to the company... investment income

NPVAdvisor :

there's will be an asset ("ownership interest in XYZ")

NPVAdvisor :

and there will either be OE or ,liability to fund it... and then there will be inestment income9 an income statement acc**t)

Customer:

Summary time: It will be favorable for me to purchase the 10% of the LLC through my company & run everything through that.

Customer:

I will receive the distributions quarterly an set up an investment income account

NPVAdvisor :

Pro - saving on some amount of self employment tax Con - maybe a little more bookkeeping

NPVAdvisor :

Become a member of the LLC Pro - maybe less paperwork, Con - pay self employment tax on that share of income

Customer:

got it thank you so much

NPVAdvisor :

SUre -- good luck with it ... a little legal advice? you might want to ask them about the operating agreement, how you/s-corp will be treated upon dissolution, any voting rights? etc LLCs are very open-ended and need to be as specific as possible in the operating agreement

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer:

okay, How can I keep a record of our conversation?

NPVAdvisor :

File-print from your browser -- bookmark (add as a favorite place) -- you could also copy the entire chat and paste to a document

NPVAdvisor :

Also, once you rate this will always be here ... as long as there's a JustAnswer

Customer:

so I can come back to this point & get you again?

NPVAdvisor :

Yes, If you want to work with me, specifically, just say "For Lane only," at the beginning of the questin and I'll get an alert

Customer:

perfect

Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9181
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Finance Specialists are ready to help you
Expert:  Lane replied 3 years ago.


Thanks for the rating Brad.

Again if you'd like to use me on another questions just say "For Lane only."


Thanks again,
Lane