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Infolawyer, Attorney
Category: Business Law
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Experience:  Experienced lawyer
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My Partner and I are trying to form LLC - elect as S

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Hi. My Partner and I are trying to form Virginia LLC - elect as S Corporation for our chain restaurant business in VIRGINIA. While my other partner will make 0% cash contribution and I make 100% cash contribution (say it for $300k), he will contribute to business with his labors and services. As for his contribution, I am rewarding my partner 25% sweat equity partnership. So my question is HOW and WHERE (if operating agreement, then where in operating agreement) do I record that in writing so there's no tax issues in the future? Also can I give him equity at the end of each fiscal years instead of giving him all at once? How do I word this in writing under which section?
The operating agreement can have s schedule with identifies the percentage of each member and monetary contribution. Under distributions normally the majority votes on distributions and maintains discretion on when done but can identify a hope of timing for doing periodically as finances permit. Please let me know if the reply is acceptable by responding "yes" or "acceptable"
Customer: replied 1 month ago.
How do I add that into operating agreement, under which section? Also, from what I understand LLC electing S-CORP is PASS-THROUGH entity. So don't all members in LLC take distribution based on direct ownership of the business? Which in this case that my partner will have right to take distribution after second fiscal year since he's going to have full sweat equity after 2 years of working at the corporate?
A schedule would identify owners and their percentages. Distributions can occur when LLC decides and need not be defined. There is a presumption of discretion which can be left alone to give the members flexibility. Please let me know if the reply is acceptable by responding "yes" or "acceptable"
Customer: replied 1 month ago.
What is tax implication for the other partners, as he makes 0% contribution. Does this have to be mentioned in so called "S Schedule?"
Not necessary. Taxed on distribution only.Kindly rate me five stars.Please let me know if the reply is acceptable by responding "yes" or "acceptable"
Customer: replied 1 month ago.
I will make sure that I rate you 5 stars but allow me to ask you question to clarify everything.Like I said in the my initial question,I plan on giving my partner 12.5% per each fiscal year upto 25%. From what I understand, this has to be stated in operating agreement, but my question is how and where?Also I am assuming S Schedule you're referring to is Schedule K - and I can state the distribution here? And it will NOT disqualify my business from electing S since my other partner is not taking distribution next two years?

You would add to a section or add a section called distributions, and in it you would provide the amount/percentage of distribution per year. This is not required to be done. If you do, you are locking yourself to doing it. The schedule is not K, but simply an exhibit to the operating agreement.

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Customer: replied 1 month ago.
Thank you for your information. Acceptable