Most likely, there won’t be a problem with you entering into a partnership with an LLC.
Your salary would be treated just like any other salary that you receive from any other business entity.
Your equity stake in the LLC, however, may require some thoughtful consideration.
First of all, it is important to understand that LLC’s are not separate tax entities. With other words, the LLC won’t owe any taxes to the IRS and State Department of Revenue, but you being one of the owners will. Here’s an example: Let’s say the LLC has generated a profit of $300,000 but decides not to pay out any dividends because they want to retain their earnings to expand the business. Under this scenario you didn’t receive a dime in dividend payments, but guess you will be on the hook for taxable revenues of about $75,000 (25% of $300,000)?
While this sounds bad, there’s an easy way to circumvent such a dilemma. Just make sure to include a clause in your member/partnership agreement that guarantees minimum dividend payments sufficient to cover any tax liabilities.
If you incorporate as a C-Corp, the situation will be different, because C-Corps are separate tax entities. However, since they are separate tax entities, they are also subject to corporate income tax, which means our fictitious revenues of $300,000 will be taxed at the corporate level by as much as 34% before the net revenues become available for allocation to you as a shareholder of the C-Corp. This is known as double taxation because you will be paying (i) income taxes at the corporate level and then (ii) personal income tax on your capital gains.
So, you being a salaried employee and member/partner in the LLC appears to be the most economical solution.
In any event, you should probably consult with an attorney or CPA to get an exact overview of the pros & cons.
I hope this helps.
Mark
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Jackson Steiner
http://www.JacksonSteiner.com
Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com
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