Expert: Ed McFarland - 8/12/2005

Question
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Followup To
Question -
We are setting up an LLC.  The primary financier will be the largest percentage owner of the co.  If he draws a salary, to show the expenses of the company as far as profit sharing, then has to reinvest the cash during tight cash flow times,  how is he taxed?  Is the money reinvested back into the company deducted from his salary?

Thanks for your help,
Rick
Answer -
A salary is for an employee and money invested comes from an investor and he gets paid back with a dividend.

Salary means you will pay unemployment and social security taxes. Dividend goes back to the investor and is reported on a 1099.


Why did you settle on a LLC and not an S Corp?

Ed,  Thanks for your quick response.  I am a CPA but work in industry.  This is one of those friends that asked me for advice after he got things started.  He set up the LLC on the advice of another inverstor buddy of his.  
Are you saying that as an owner/manager he should only receive dividends?  The other parners in the business are providing expertise but no capital.  They are setting up a profit sharing plan so they all benefit at the end of the year above their salaries.  My thought is that the owner/manager should draw a salary or the profit being split up would favor the other investors.  But,if he draws a salary and cash gets tight, he will have to re-invest some his salary back into the business to pay invoices.  Will he be taxed on the salary even if he doesn't get to keep it.  I hope I am asking this in a way that makes sense.  Thanks again for you help.  I will probably have to dust off some old text books to help him set some of this up.

Rick

Answer
There is nothing wrong for him to get a salary, just that being a salaried employee is one thing and investor another.

By getting a salary, the company is on the hook for the unemployment taxes, social security match. If you can set them up as contractors, then you could pay them via a 1099.

Given his involvement, I'd think about using a promissary note for his claim to the invested funds. After all the others expertise won't matter if there is no capital.

Good luck