Equity or alternative compensation in an LLC?
I'm not sure 1099-MISC is what you should expect. Equity means ownership, and in LLC context it means membership. As an LLC member, you'll get distributions and should receive a K-1 form for tax treatment, not 1099 or W2. If the CEO is talking about 1099 it means he's going to hire you as a contractor which contradicts the statement about equity allocation. That's an entirely different situation. 1) Specifically, would the 1099-MISC form be used in this case? 1099-MISC is used to describe various payments. Depending on which box is filled, the tax treatment may be as of employment income (subject to SE taxes) or passive income (royalties, rents, etc - subject to various limitations in the tax code). 3) If this is the only logical method of compensation (receiving a % of real estate sales), how would it be taxed? That would probably be a commission and taxed as employment income. I suggest to get a professional tax adviser consultation on this issue, with specific details, numbers, and kinds of deals involved. You can get gain or lose a lot of money just because you're characterized as a contractor and not LLC member or employee (each has its own benefits and disadvantages, and you have to consider them all). 4) Are there any advantages/disadvantages to acquiring and selling   properties through the company as opposed to receiving a % of sales? Yes. There are advantages and there are disadvantages. For example, if you're using a corporation, you can get salary, if you're a contractor you cannot. There are a lot of issues hidden in this distinction (which I've just discussed with KeithS in this argument).
"Oh, I understand now -- we're having an absurd, meaningless conversation about an obscure theoretical point.  When you can tell me how you can determine a ""minimum cash"" level from a public company's filings, we can continue the discussion.  Otherwise, make a simplifying assumption and move on.  I misunderstood -- I thought we were actually trying to understand the difference between enterprise value and equity value / understand the implication of an enterprise value multiple." "IANAL, but if you're planning to sell shares in your LLC you may be disappointed in the protection granted. I looked into this corporate structure for the same purpose myself, and my attorney said something like, ""If an owner of one of the shares of your company is driving to look at one of the properties, and gets into a wreck for which they were found negligent, the injured party can sue the corporation.""" There are some nuances with HCE definition. To answer your questions. It's compensation as defined by the plan. Usually it's gross comp, but it can exclude things like fringe benefits, overtime pay, commissions, bonuses, etc. The compensation test is also a look-back test, meaning that an EE is determined to be an HCE in the current year if their compensation in the previous year was over the limit. I'm not sure how stock options affect this, but I expect they would be counted. Probably have an ESOP plan at that point too which is a whole other can-o-woms. The 5% owner test applies to the current year and also has a one-year look-back period. If at ANY point, even for a day, an employee was more than 5% owner, they are HCE for that year and next. Yes there is a limit. A company may limit the amount of HCE's to the top 20% of employees by pay like Aganju said. They can also disregard employees that may otherwise have been excluded under the plan using statutory exclusions. Example, they can disregard employees under 21 years and with less than 1 year of service. Hahaha, the IRS does not like to concisely define things. You can look here, that's probably as concise as you'll get. Hope this helps! I was merely trying to be helpful - Conceptually, you have dump this idea that something is skewed. It isn't. Firm A sold for $500 (equity value aka purchase price to shareholders) + debt (zero) - cash (50) for 450.  Enterprise value is the cash free, debt free sale price.  The implied ev multiple is 4.5x on A - that is the answer. The other business sold for a higher multiple of 5x.  If you would pile on more cash onto A, the purchase price would increase, but the EV wouldn't.      The idea is to think hard about the difference between equity value and enterprise value when examining a transaction. "Simply paying him back the 50K to reduce ""his equity"" back to 30% doesn't necessarily mean that he still doesn't have a higher liq pref upon a liquidation event. You don't need the legal language to know...I deal with term sheets all the time, I don't deal in the legal language, we cut the deal with the term sheet and leave the legal language to the lawyers." "This is actually quite a complicated issue. I suggest you talk to a properly licensed tax adviser (EA/CPA licensed in your State). Legal advice (from an attorney licensed in your State) is also highly recommended. There are many issues at hand here. Income - both types of entities are pass-through, so ""earnings"" are taxed the same. However, for S-Corp there's a ""reasonable compensation"" requirement, so while B and C don't do any ""work"" they may be required to draw salary as executives/directors (if they act as such). Equity - for S-Corp you cannot have different classes of shares, all are the same. So you cannot have 2 partners contribute money and third to contribute nothing (work is compensated, you'll be getting salary) and all three have the same stake in the company. You can have that with an LLC. Expansion - S-Corp is limited to X shareholders, all of which have to be Americans. Once you get a foreign partner, or more than 100 partners - you automatically become C-Corp whether you want it or not. Investors - it would be very hard for you to find external investors if you're a LLC. There are many more things to consider. Do not make this decision lightly. Fixing things is usually much more expensive than doing them right at the first place." Pool their money into my own brokerage account and simply split the gains/losses proportional to the amount of money that we've each   contributed to the account. I'm wary of this approach due to the tax   implications and perhaps other legal issues so I'd appreciate   community insight here. You're right to be wary. You might run into gift tax issues, as well as income tax liability and appropriation of earnings. Not a good idea at all. Don't do this. Have them set up their own brokerage account and have them give me the   login credentials and I manage the investments for them. This is   obviously the best approach from a tracking and tax perspective, but   harder for me to manage; to be honest I'm already spending more time   than I want to managing my own investments, so option 1 really appeals   to me if the drawbacks aren't prohibitive. That would also require you to be a licensed financial adviser, at least to the best of my understanding. Otherwise there's a lot of issues with potential liability (if you make investments that lose money - you might be required to repay the losses). You should do this only with a proper legal and tax advice - from an attorney and/or CPA/EA licensed in your state. There are proper ways to do this (limited partnership or LLC, for example), but you have to cover your ass-ets with proper operating agreements in place that have to be reviewed by legal counsel of each of the members/partners, "In the Income Statement that you've linked to, look for the line labeled ""Net Income"". That's followed by a line labeled ""Preferred Dividends"", which is followed by ""Income Available to Common Excl. Extra Items"" and ""Income Available to Common Incl. Extra Items"". Those last two are the ones to look at. The key is that these lines reflect income minus dividends paid to preferred stockholders (of which there are none here), and that's income that's available to ordinary shareholders, i.e., ""earnings for the common stock""." Are you talking about domicile? An LLC is treated differently than a corporation in the terms of citizenship of the law. An LLC is a citizen of whichever state it's members (shareholders) are citizens.  I would recommend you just spend the money on a business attorney to ensure that all the t's are crossed correctly so it doesn't end up costing you more later on. In accrual accounting, you account for items on the income statement when the service has been delivered - in this case, the service that your employees are providing your company. Because of this, you incur the expense in the fiscal year that your employees work for you. So, you incur the expense, and net income decreases by (1-t)*wage expense.  Net income decreases, so owners' equity decreases; to balance you credit wages payable. Once the wages are paid, you decrease the liabilities side (wages payable) and offset it with a Cash change on the assets side. "Many thanks for thedetailed  response, appreciate it. But I am still not clear on the distinction between a public company and the equity holders. Isn't a public company = shareholders + equity holders? Or do you mean ""company"" = shareholders+equity holders + debt holders?" I think I may have figured this out but if someone could double check my reasoning I'd appreciate it. So if my company makes $75000 and I decide to pay myself a $30000 salary, then the quarterly payment break down would be like this: 1040ES: Would pay income tax on non salary dividend ($45000) 941: Would pay income tax, SS, medicare on salary ($30000) (I'm the only person on payroll) So I think this answers my question in that after switching from filing as LLC to S-corp, I won't have to pay as much on 1040ES because some of it will now be covered on payroll. "It's actually the other way around.  Distributions in an LLC are usually based on  each member's equity share, although the operating agreement can specify how often such distributions are made.  Shareholders in a corporation can receive dividends, but those are determined by the corporation's board and can vary depending on the class of stock each shareholder owns.  Preferred-class shareholders, who may hold a smaller overall fraction of the company's outstanding shares than the common stock shareholders, may receive disproportionately larger dividends per share than common stock shareholders, which is one of the (many) reasons that preferred stock is a better choice when it is available.  Take, for instance, what Berkshire Class ""A"" shareholders receive in dividends per year compared to Class ""B"" shareholders. Here's a good link from LegalZoom that can explain what you're asking about: Explanation of LLC distributions I hope this helps. Good luck!" The partnership agrees to pay each of you salaries and/or bonuses, typically based on the net profit brought in. You do have a legal document setting out the rules for this partnership, right? If so, the exact answer should be in there. If you don't or it isn't, you need a lawyer yesterday. I'm not sure why you think that it matters that the distribution goes to an S-Corp vs an individual tax payer. You seem to think it has any relevance to your question, but it doesn't. It only confuses your readers. The situation is like this: LLC X is deriving income in State #2. It has two members (I and S) residents of State #1. Members I and S pay all their taxes to State #1, and don't pay taxes to State #2. State #2 audited member I and that member now needs to pay back taxes and penalties to State #2 on income derived from that State. Your question: Does that mean that member S should be worried, since that member was essentially doing the exact same thing as member I? My answer: Yes.