Multi-member LLC Income Tax question

[LSTQs]

What am I missing here?

I want to do a 3 member LLC, however we would be doing contract work - and we want to get paid by contracts. So set ownership %s won't work out, as person A could do 100k of contracts this year, person B with less time, respectively, could do 20k and person C could do 60k, let's say. That could shift big time the year after. There are activities that the group would do together that would bring in money, say maybe 30k a year. So how do you set up the LLC for income splitting so person A is paying taxes on the 110k, person B just 30k and person C just 70k?

Thanks!

 

[Taxing Matters]

What am I missing here?

I want to do a 3 member LLC, however we would be doing contract work - and we want to get paid by contracts. So set ownership %s won't work out, as person A could do 100k of contracts this year, person B with less time, respectively, could do 20k and person C could do 60k, let's say. That could shift big time the year after. There are activities that the group would do together that would bring in money, say maybe 30k a year. So how do you set up the LLC for income splitting so person A is paying taxes on the 110k, person B just 30k and person C just 70k?

Thanks!

You have a problem because with a LLC classified as partnership the members of the LLC (partners for tax purposes) are as a general rule taxed on their share of the income from the partnership based on their ownership interests in the LLC, not based on how much work they do for the partnership. If you want each person to get the income just from the jobs he or she does then a LLC or partnership is really not the appropriate way to do that. You could simply set up the LLC to be for the joint jobs you do together that you want to split the profits from, and just keep your separate jobs out of the LLC. I suggest you see a business attorney and tax attorney for help in setting up what will work best for you given what you want to do.

 

[LdiJ]

One possibility is that you could form an LLC and make an S-corp election. If you did that, you could pay yourselves salaries commiserate with your contracts, and deduct your business expenses prior to determining profits in excess of your salaries. However, TM really did give the best advice regarding consulting both a business attorney and a tax professional.