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New LLC Partners - Salary or draw?

  • ACC
    • 1 posts
    January 20, 2007 1:12 PM EST

    Startup LLC with recent revenue(approx. $500k annually). Three partners. Do we pay each a salary or a draw vs. profit?  Percent of ownership is 50%, 30%, and 20%.  Amount of work for each varies as does experience and initial investment.  How should payouts work?  Which way produces minimum in tax expense?  Any feedback helpful. Thanks. ACC

    • 4 posts
    May 28, 2008 2:56 PM EDT
    It depends if you will file your taxes as an S-Corp or Partnership. As an S-Corp you can pay out a salary either every two weeks, twice monthly, monthly however you want but if you are filing Partnership, taking it out as a draw is recommended...at least this is what my accountant told me. Good luck!!

    Ashley
    • 1 posts
    November 8, 2007 1:34 PM EST
    Did you ever get any info on this?
  • November 25, 2007 7:57 AM EST
    This is tough one, becaue I am dealing with the same thing right now with my business. I would try to pay the employees as much as you can, this way they feel that they are not working for free, even a little bit will help them stay interested. 

    I have a partner who works with me on my site and I only pay him what I can, but he knows that the idea is a great idea and very marketable, so he agreed to stay on and work his tail off because he sees how the site can and will be profitable down the road; advertising revenue, the sale of the website and business, etc...

    I personally don`t make much with the site, but I also see the income potential down the road, as does my partner and that is why we have both agreed, contracted and not verbal, to stick with this for the long haul. If your employees can see the long term benefits of this business they should have no problem being paid what you can afford to pay them now, because the long term payout will be very profitable. 

    Good Luck


    ---
    The ConsumerTreehouse.com Team
    www.consumertreehouse.com

    • 79 posts
    November 8, 2007 4:03 PM EST

    Why not pay each partner a fair salary based on their work then the rest as dividend based on the percentage?

    If the 20% partner contribute the most to the running of the business, his salary will be the highest among the three since it is based on the job performed. However, his dividend portion will be the smallest.

    • 21 posts
    November 10, 2007 12:42 AM EST
    I can`t help with tax advice but I can ask the question: why are you taking money out of the business if its a startup? Many people would think to re-invest that money into growing the company for the first 3-5 years. A common strategy is to just pay employees (you are an employee) salaries during that time and, afterwards, start taking dividends or sell.

    I suppose it all depends on what you ultimately want from this business. You really only have a few possibilities of "end game" with a startup (optimistically speaking):
    1. Sell the business
    2. Keep the business and take dividends out every qtr/yr
    3. IPO
    If your goals are #1 or #3, then I don`t think you should take much out of the business, if any, during the startup phase.  Maybe I`m missing something though - I`m still new at all of this myself!