Forums: Discussions for entrepreneurs and small business.

I have created a small-business with two other partners two years ago in the IT field. The business is an LLC. We are experiencing huge growth this year. We have decided to work full-time on the business this year and get compensated. I understand that an LLC can pay its members a "Guaranteed Payment" for services rendered. The three of us perform similar tasks. However we live in different states with different standards of living (FL, NY, MA). What should be a fair way to calculate the "Guaranteed Payments" for each one? Should we get the same amounts or should that amount take into consideration the standard of living for each state? What other businesses in similar situation typically do?

I do understand that an LLC member needs to pay taxes on both the guaranteed payment and his/her share of the profit

Hi Badrkhan

We are a tax, financial and growth strategy firm represently numerous LLC's. The determination of the earnings allocations for partners in an LLC is based on several factors including the needs of the partners as well as the operating expenses of the business.  Each allocation is based on calculated measurements and performance. I would be pleased to arrange a 1/2 hour complimentary consultation with you to discuss further.  My partner and I are located in the Metro Ny Area so we may be able to assist you with your growth issues beyond the initial call. please E mail me and we can arrange a time to speak.

Regards

Michael Janicki

mjanicki@janconsultinggroup.com

Its all true, but its basically what you and your partners agree on. If they agree on having the LLC pay what you believe is fair then you are good to go. It all should be part of your operating agreement to begin with.

Just keep in mind that the IRS may want to see some economic substance to the allocation – such as investment, hours worked, expertise, etc.  You have a very wide range in how you implement that as long as the allocation is not done primarily to reduce taxes.  The most important thing is to document the why behind the allocations and you should be audit proof.  Just don’t write something like “Partner A is allocated 10% of profits because that partner is in the highest tax bracket”.