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Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I have a LLC with 4 member including myself. Our business is

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I have a LLC with 4 member including myself. Our business is around selling hommemade log furniture both retail and wholesale. A few members were expressing interest in implementing a commission incentive program to help promote selling our product. Currently it is just us 4, no other employees. Is there a way to set this up and keep the distributions the same and not converting the LLC from being taxed as a partnership?

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

If you are talking about rewarding a partner for selling product, there's no reason that "commission payments" have to be equal among the partners. I take it you are reporting as a partnership now?

Customer:

that is correct. The goal is to implement a commission program in addition to keeping the draws from the company equal to each member's ownership equity

Stephen G. :

You may be thinking of S-Corp distributions which must be equal in terms of the stock ownership.

Stephen G. :

Well you can't keep the draws equal if one partner is going to earn a commission and the other partners don't earn the same commission or no commission.

Stephen G. :

What would be the point of a commission if it wasn't paid to the partner entitled to it?

Customer:

Agreed. So in order to implement this program to be an addition to what the draws are now (which are relative to each member's ownership %) while keeping the tax status as a partnership is to set up the terms of the comission in the operating agreement?

Stephen G. :

Yes or in a separate agreement which outlines the terms of the commission program & all members should sign it.

Stephen G. :

You would just credit the partner's account with the commissions earned & possibly have a provision to make a special draw to pay the commissions earned on a periodic basis.

Customer:

And this will not require payment of self-employment tax, etc.?

Stephen G. :

Oh no, it will be subject to self-employment tax; the earnings will be reported along with whatever else is earned on your K-1s.

Customer:

Okay. Thanks for all of your help. It has helped me a lot! Just to restate, having a commission program will NOT affect the tax classification of the LLC as a partnership?

Stephen G. :

Not at all.

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Customer:

Will do! Thanks again!

Stephen G. :

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