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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9462
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

This answer was rated:

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?

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 and 3 other Finance Specialists are ready to help you


Thanks for the rating Brad.

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


Thanks again,
Lane