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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12663
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My business partner and I will be given a certain percentage

Customer Question

My business partner and I will be given a certain percentage of a car dealership's gross profit after each fiscal year. We are setting up an LLC instead of receiving those payments personally and being 50/50 shareholders in the LLC. Is there anything I need to know or specific setup that would be ideal for this in setting up this new LLC?
Submitted: 1 year ago via Cornell Legal Info Institute.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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From a tax perspective, there are realy no issues, othe than recognizing that you will be taxed as a partnership.

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An LLC with more than one member (owner in LLC terminology) is taxed as a partnership - Does a 1065 (prtnership tax return) and the profits and losses are allocated to the partners with a form K-1, which each partner uses to prepare their own taxes.

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The LLC still provides the corporate liability protection of the corporatoin (one of the reasons the LLC is the fasted growing entity types today - provides the corporate liability protection of the corporation but the flexibility of the partnership) but isn't taxed at the partnership level at al .. everyhing simply passes through to the owners.

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The only reason you might want to go with S-Corp taxation for the LLC (done by simply filing form 2553) is to save on payroll taxes (S-Corp taxation is still a passthrough - BUT, once you've paid your selves the required S-Corp salary, the REST of the profit flows to the shareholders via a K-1 (on which [NO] social security or medicare tax is charged).

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BUT this onlyu makes sense once you've become HIGHLY profitable ... There will be no tax savings on the required reasonable salary that IRS requires, only non the profits over and above that AND your other expenses.

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So the breakeven is when your profits are notn only well over salaries, but also over and above the additional costs born by the S-Corp to payfor payroll accounting, W-2 preparation, quarterly payroll tax retirns (941's), paying in SS & Medicare at least monthly, etc. etc.

Expert:  Lane replied 1 year ago.

One thing that IS impoortant with the LLC is doing an operating agreement. Most state's don't reauire it, as they do charters and by-laws for corporations, BUt it allows oyu to think through things ahead of time , such as how profits and losses are handled (ownershipnpercentage is REQUIRED for corporations) what happens upon the death divorce or disability of one of the owners etc. etc.

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ANd if you ever ARE sued or have creditor issues, the operating agreement (and managing against it) helps tonprotect that separate entity status.

Expert:  Lane replied 1 year ago.

I hope this has helped. … Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

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Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.