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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Our LLC is own by 50% each by two other LLC - one own by each

Resolved Question:

Our LLC is own by 50% each by two other LLC - one own by each mamaging member of the New LLC

We have arm length agreement with the two LLC that own the LLC for consulting fees

The consulting fee is calculated based on a formula tied to income

The question is this the best way to handle the funds to the two managing members?
Submitted: 5 years ago.
Category: Tax
Expert:  RD replied 5 years ago.

RD :

I presume the LLC is paying consulting fee to each of the LLCs.

RD :

What is your question with regards XXXXX XXXXX the funds? can you clarify?

Customer:

Yes paying consulting fees to each LLC

Customer:

The question is this the best way to handle it or should we be taking a distribution as related to federal tax?

Customer:

Can the funds we take out be classified as dividends?

RD :

The fees paid to the LLC is for the services and hence it should be considered as expense on the main LLC and income for the 2 LLCs receiving it.

RD :

The distributions from the 2 LLCs ' after the expenses can be considered as draw/distribution.

Customer:

Can I also classify the distribution as dividends?

RD :

Normally LLCs pay out to the members as distribution and not as dividends. Since LLC's pass the income to the members on K-1 and members are taxed on this income, the distributions are generally not subject to tax. Hence, distribution(or dividends if you so classify) from the LLC will normally not be subject to tax.

Customer:

If we cassify it at dividends then we pay tax at a flat federal tax rate?

RD :

If you classify your LLC as a Corporation and file as a C Corp than the LLC will report the income and expense and pay tax on the net income. In such a case dividends will be paid out to the members and taxed to them.

RD :

However, this generally leads to double taxation and hence is not advisable.

RD :

The LLC(filing as C Corp) is taxed and than the dividends are taxed to the members

RD and other Tax Specialists are ready to help you