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We are just starting a business and we just formed a limited…

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We are just starting a...
We are just starting a business and we just formed a limited liability corporation. There are 4 -25% equal partners in the LLC. There are 2 of us with good credit and 2 of us with poor credit. We are wanting to apply for a lease on some equipment. We were told that since all 4 of us are equal partners on the LLC that all partners would have to be on the lease application or loan application. We can just change the LLC agreement to either reduce the interest or remove the partners with poor credit. Our question is: Are there any advantages to removing or is better to reduce (say down to 5% or 10%) the partners with the poor credit. All 4 members are going to be working at the new business so it could be either 2 employess and 2 owners collecting paychecks verses 4 owners collecting paychecks and we just work out an agreement to get the business up and running. The business is in Washington State
Submitted: 8 years ago.Category: Tax
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6/16/2010
Tax Professional: BK-CPA, Certified Public Accountant (CPA) replied 8 years ago
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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The owners, assuming they are not limited partners, are going to be responsible for the partnership's debts, actions, etc. If two of these people are to be held equally responsible in comparison to the other two, then all four people should have an equal ownership percentage, generally speaking.

 

If not all four people are able to contribute the same amount of money or equity to the partnership, then there are some methods for dealing with it (ie... toying with the partnership agreement as you suggest, special elections and special allocations, earning/paying for an ownership share through wages, etc.).

 

The main point that I want to make, regardless of how you go about doing what you feel is best, XXXXX XXXXX make sure that liability is apportioned the way all four partners intend, in addition to income, and pass-through tax percentages.

 

Consulting an attorney and/or CPA tends to be a good idea when starting a business, assuming it's feasible. I've seen partnerships go sour many a time, and when things are not agreed upon properly in the beginning, things can in turn get 'pretty bad.'

 

Let me know if you need more clarification.

 

Thank you for your question.



Edited by BK-CPA on 6/16/2010 at 11:56 PM EST
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Customer reply replied 8 years ago

I apologize if my question was not clear enough. We wanted to know in the short term if there is any advantage to having the 2 with poor credit just get a paycheck every week as employees of the LLC or small part owners of the LLC and receive a paycheck every week. A financial advantage where we would pay less fees and taxes such as employment tax and so forth.

Tax Professional: BK-CPA, Certified Public Accountant (CPA) replied 8 years ago

I have noted your response and will reply later tonight with an answer when I have more time.

 

Until then, please tell me what kind of business this is. More specifically, what do you do?

 

Thank you!

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Customer reply replied 8 years ago
This is an ice cream business and I am 1 of the owner's with good credit. it's just that
washington State heavily taxes businesses. So we are just looking at options.
We are going to have to do something to either get a loan or a lease in terms of reducing or removing the 2 with poor credit.
Tax Professional: BK-CPA, Certified Public Accountant (CPA) replied 8 years ago

Hi there. An ice cream biz sounds like a lot of fun. Congratulations. There also isn't a terrible amount of liability above and beyond the normal risks of putting your money up, so that's good given your question.

 

All four people are able to keep the same income percentages, even though not all four people put up the capital. All this takes is a partnership agreement, in general.

 

For taxes, you want to keep wages down generally, because then you'll get hit with unemployment taxes. Theoretically, wages should be reasonable for the work done, not a means of controlling ownership. For example, if excessive wages are being paid to someone in a lower tax bracket than you, the IRS could theoretically see this as a tax avoidance scheme (not likely, no).

 

The best way to avoid taxes might be an S-Corp, especially if all of you are active and working in the business. An S-Corp would not allow special allocations and partnership elections though, which is something that may end up being important too.

 

What I mean by a special election, or allocation, is the partnership's ability to try and be fair to all owners in general. For example: If one puts up cash and the other property, but the one putting up the property has no basis, then an election can be made. A special allocation of depreciation/interest may be in order. etc.

 

In your case, if you have two people that are not able to put up any capital, then giving them a 50% interest is going to more or less be a gift. They can sign the note(s) to give them equity, but should they default, you'll have to pay likely as a co-signer, and good luck going after them to get your money back after you've pay the bank on their behalf.

 

I suggest, in general, making sure that the profits and losses are initially divided up according to the capital risks if you are going for 'fairness.' If someone does all the work, that person should get more in wages, draining the residual partnership income.

 

Again, don't take on more liability than you intend to. If you've got a handle on this, so be it, but if this is your first business and/or you have any doubts about your partners' abilities even if not their intentions, then don't be afraid to protect yourself despite wanting to also 'do what it takes' to get the business going.

 

Thank you again.

 

Good luck again too. As always, don't hesitate for more clarification.

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