Question about transfers from a corporation

[cfspartan]

What is the name of your state? Wyoming

This is lengthy question, so please bear with me. I have created an LLC to separate my business interests. In this LLC I have a 50% partner. We are due to receive a payment of $100,000, making a potential distribution to each partner equal to $50,000. Now, we want to maintain ownership privacy while reducing the tax we pay on this amount as much as possible. The LLC formed is mainly a paymaster of sorts and we do not actively engage in a traditional business. It was formed so that we personally did not receive the commissions.

My Questions:
1. Can two S-Corps be each 50% owners in the LLC and thus receive the distribution?
1a. If the LLC is taxed as a Corporation, will this cause the corporation to be taxed at the company level as well as the recipients of the distribution?
1b. If the LLC is taxed as a partnership, can the distribution then flow through to another flow-through entity so that we can take advantage of business deductions?
2. Will the LLC be disregarded by the IRS as an "alter ego" because it is just receiving the payment?
3. Could we tax the LLC as a corporation and instead invoice the entity for our respective amounts due? If we did that, would the corporation be disregarded for any reason?

ANy help would be appreciated. I do expect to speak with a CPA, but would like to round out my knowledge as much as possible before this meeting.

Thank you all so much for your future responses.
CFSPARTAN

 

[abezon]

Briefly:
1. Depends on state law.
1a. Yes, unless the LLC corp elects to be taxed as an S-corp by filing form 2553. There are deadlines for filing 2553, so download the instructions now.
1b. No point in doing that. The default tax treatment for a multiple-member LLC is partnership. The LLC files a partnership return & reports all income & expenses on its 1065. The net profit flows to the members & they pay SE taxes thereon.
If anyone wants to claim a home office deduction or car expenses, set up the p'ship agreement to say that partners have to pay certain expenses out-of-pocket. Then the partner takes that expense on his/her personal return, instead of the LLC taking it on the 1065.
2. No. Only a single-member LLC or a qualified subchapter S subsidiary is a disregarded entity in tax terms. QSSSs are used to limit business liability without creating a separate taxable entity.
3. You can't tax anything; only the gov't can tax. Invoicing the LLC would not save you any taxes & would mean each member had to file a Schedule C & list their share of expenses separately. This means you'd almost have to do your taxes together to make sure you didn't over- or underclaim expenses.

If you came to talk to me, I'd take a look at your projected expenses & net profit & maybe urge you to elect S status. The advantage is that you pay yourselves salaries (deducted on the LLCs 1120S return), and payroll taxes are withheld so you don't have to figure SE taxes. The disadvantage is that you have to pay yourselves salaries, which means filing & paying quarterly federal & state employer tax returns (940/941/etc.). Also, the salary must be "reasonable" & if you set it too low, the IRS will reset it for you & charge interest & penalties on the deficiency. An S-corp can also set up retirment plans (SIMPLE IRA might be best) to allow for payroll deduction that exceeds the $4,000 IRA maximum & allows for an employer match.

 

[LdiJ]

I don't disagree with anything that Abezon said....but I think that you need a consult with a local tax professional. I don't think that you understand things enough not to do that.

 

[cfspartan]

Clarified

Thank you very much for your reply. I do fully intend to speak with someone on the matter, but I wanted to educate myself as much as possible in order to be capable of asking the right questions.

I currently own and operate an S-Corp that does a variety of things and has a variety of revenue streams. I was hoping, for the sake of simplicity, to elect for the LLC to be taxed as a corporation (8832) and use my S-Corp to invoice my proportionate share of LLC profits. I do not want to share expenses with my associate and want to separate from him as much as possible given that we worked together on this project. He is haphazard with his record keeping and his actions literally destroy any corporate veil that exists between company and personal.

So in effect, the LLC (taxed as C-Corp) would receive $100,000 and then be invoiced for whatever amount is left after escrow fees and miscellaneous expenses - 50% to each of two entities. From there, I would receive my $48K or so and be able to treat it as I would ordinarily treat it through my S-Corp.

I may be repeating myself, but I wanted to be sure I was clear. This is the optimal scenario for me and am hoping that your comments help me understand it further.

Thanks again,
CFSPARTAN

 

[LdiJ]

Thank you very much for your reply. I do fully intend to speak with someone on the matter, but I wanted to educate myself as much as possible in order to be capable of asking the right questions.

I currently own and operate an S-Corp that does a variety of things and has a variety of revenue streams. I was hoping, for the sake of simplicity, to elect for the LLC to be taxed as a corporation (8832) and use my S-Corp to invoice my proportionate share of LLC profits. I do not want to share expenses with my associate and want to separate from him as much as possible given that we worked together on this project. He is haphazard with his record keeping and his actions literally destroy any corporate veil that exists between company and personal.

So in effect, the LLC (taxed as C-Corp) would receive $100,000 and then be invoiced for whatever amount is left after escrow fees and miscellaneous expenses - 50% to each of two entities. From there, I would receive my $48K or so and be able to treat it as I would ordinarily treat it through my S-Corp.

I may be repeating myself, but I wanted to be sure I was clear. This is the optimal scenario for me and am hoping that your comments help me understand it further.

Thanks again,
CFSPARTAN

I don't see why the LLC couldn't be an S-corp 50% owned by your other S-corp, therefore making the income pass through income.

However, I also don't see why the income couldn't come into your S-corp, and then you pay out the other person's share via a 1099.

 

[cfspartan]

I don't see why the LLC couldn't be an S-corp 50% owned by your other S-corp, therefore making the income pass through income.

However, I also don't see why the income couldn't come into your S-corp, and then you pay out the other person's share via a 1099.

I wanted to maintain some semblance of privacy. I don't want it to show that $100K is coming directly to my s-corp. If the LLC is owned by two S-Corps, which according to Wyoming statues seems to be allowed, wouldn't the income flow through without it having to be an S-corp or would it be better for the LLC to be an S-Corp in this instance? I thought that S-Corps could not have entity investors or owners?

Thanks again,
CFSPARTAN

 

[LdiJ]

I wanted to maintain some semblance of privacy. I don't want it to show that $100K is coming directly to my s-corp. If the LLC is owned by two S-Corps, which according to Wyoming statues seems to be allowed, wouldn't the income flow through without it having to be an S-corp or would it be better for the LLC to be an S-Corp in this instance? I thought that S-Corps could not have entity investors or owners?

Thanks again,
CFSPARTAN

They can if the entity is another S-corp. However, he wouldn't have to form an S-corp also (if he doesn't already have one) He could simple own his shares of the LLC directly.

However again, you MUST consult with a local professional.

 

[cfspartan]

They can if the entity is another S-corp. However, he wouldn't have to form an S-corp also (if he doesn't already have one) He could simple own his shares of the LLC directly.

However again, you MUST consult with a local professional.

Thank you both so much for your replies. I will be meeting with a local CPA next week to iron out the details. At least now I feel as though I can ask competent questions.

CFSPARTAN

 

[tranquility]

I just came into this late, but I *hate* complexity. I really, really hate it when people use flexible facts to try to bend things to what they want. The first question I ask is: What happened?

First we have funds entering an LLC where the OP is a 50% owner. Then there is consideration of an S-Corp as the owner. Which is it? Was the LLC in receipt of the funds because of personal services of the owner? Did the S-Corp have a salary to the OP and a written contract with the LLC to loan out the services of its employee (OP) for the work for the "commissions" and then "invoice" for that? What?

When we get to the consideration of the ordinary and necessary expenses of doing business deduction, I'm not sure you can divide that among the partners through shifting shell games. I so little know what *exactly* is going on I can't really give advice other than to see a professional and bring him all the facts.

 

[cfspartan]

Thanks Tranquility,

Yes, it is complex, and I have my reasons for doing so. I don't mind paying tax on the money. That isn't the issue. The issue is privacy and if I can add one or two steps in the mix before I receive the distribution, that is preferable as long as it doesn't cause additional expenses in the process such as taxed revenue in two sources. In a simple scenario, which this isn't, I would just have 50% of the money come directly to my S-Corp. I will, as I have said before, certainly sit with a CPA in my jurisdiction. I wanted to get some ideas first so that I could throw them at the CPA and see what he/she can come up with. Thanks for the post!

CFSPARTAN

 

[tranquility]

Just because the LLC has not received the money before it becomes "owned" by the S-Corp, does not mean you are going to be able to take everything through the S-Corp. I mean, all legal like. I know the chance for audit is low and the chance to be caught is low even if audited, but I'm still not sure about what happened or will happen. What is the LLC agreement? Say LLC gets invoiced by S-Corp for your 1/2 of the 1099 amount leaving 1/2 for LLC "profit". Do you split the profit with your co-owner now? I know you won't (to be fair), but you don't get to shift things from one owner to another because it suits purposes of the moment. (Many have tried this between high-marginal rate taxpayers and low-marginal rate taxpayers.)

I understand the privacy issue, but the die seems to already been cast. The only thing to change is on how to deal with things in the future.

 

[cfspartan]

I think your comment gets the meat of the issue. In reality, I want to operate a shell by using the LLC. I just want the money to go in and come out. I don't want to share expenses with the partner for a variety of reasons. Let me ask you this... suppose my partner is the owner of the LLC and the LLC receives 100% of the disbursement. I invoice the LLC via my S-Corp for my 50% less any accrued expenses for organization etc. and he can use the rest as he sees fit.

I would rather the LLC have no income to speak of, but it doesn't seem like that is "kosher". I know you guys aren't the IRS, but would they be put off by an LLC that earns $100K and has $100K in expenses? This is especially suspicious, I assume, if this scenario were to repeat itself and develop a pattern of moving the funds around.

This is definitely the most intellectually stimulating forum I've been a part of!

CFSPARTAN

 

[tranquility]

If your partner owns the LLC and S-Corp invoices the 50%, there is no problem--except for the transfer of ownership to partner. LLC has something right now. I don't think we can call it an account receivable (by my understanding of what is happening) as yet and since it is probably a cash basis entity, we don't have an accrued income. But, yet, it's something. We *know* this because you wouldn't transfer your share of the LLC to partner without some guarantee he would accept the invoice from S-Corp. And, if S-Corp has a prior contractual relationship with LLC (to pay for your services), what is your basis going to be in LLC on transfer?

Even though you are probably cash basis, a "sale" is subject to liabilities which are outstanding. I don't know, without research, how to treat the transfer of ownership in this situation as you already seem to have done the work and just haven't gotten paid as yet. Just being a cash basis taxpayer (LLC?) doesn't disappear this right.

The problem with everything is timing. All the plans you are making seem to fail from this timing perspective. True, there may be some wiggle-room based on the specific facts, but it's going to take some money to a professional for research to see if the room can be used.

Finally, while no question has been made as to your desire for privacy, make sure you have a proper purpose for the privacy you desire. If the purpose is privacy from the government, creditors or soon-to-be-ex wife, you may have a problem when you start doing fancy accounting to hide the reality of events which seem to already have happened.

 

[cfspartan]

Thanks again for your reply. No, the privacy desired has nothing to do with government, creditors, or an ex-wife, or any other nefarious arrangement. I am working both sides of a transaction and getting a cut on revenues as well as an upfront commission. While completely within my ability legally to do so, I'd rather keep it on the DL how much I'm getting up front. Timing is fluid. I control the transaction. The LLC is formed, but doesn't necessarily have to be used. We can arrange it however my counsel sees fit at this point. I see no barriers to timing right now. We're about a month to six weeks away from this happening, which should be ample time to get the proper structure in place.

CFSPARTAN

 

[abezon]

OK, here's a problem -- conflict of interest & breach of fiduciary duty. Your arrangement is "nefarious" precisely because you are working both sides of the transaction without telling your associate.

A multiple-member LLC is a partnership, & partners have a fiduciary duty not to scr*w over each other. Partner A voting for Partnership AB to contract with company C is fine, unless partner A is getting something directly from company C & fails to disclose this fact to B. The reason why is that after company C pay out its funds, A is getting more money from the deal than B. Thus, A is willing to pay more for the deal than s/he would pay if there was no direct monetary incentive from C.

Now, the way around this problem is for A to disclose his/her conflict to B & have B waive any conflict of interest in writing after opportunity to consult with independent counsel. If you do that, B can't sue you for half of the money you receive from C. Plus attorney fees. B will probably even agree to this, if your relationship with C is the reason AB is getting the contract at all.