September 17, 2016

Can an LLC Pay Members an Hourly Wage that Varies on a Project-to-Project Basis?

Can an LLC pay its members an hourly wage, which is tied directly to the number of service hours contributed to the enterprise, and perhaps even to a percentage of the actual money brought in on a given money earning project? Can these hourly payments be considered “guaranteed payments,” in the same way that a flat salary paid to members would be?

Here’s the situation: my friends are starting an LLC to provide web design, programming, and multimedia services to business clients. One member is a designer, one is a multimedia specialist, the third a programmer. They anticipate that the amount of money they will bring in, and how much of that money is due to the contributions of any one of the three contributing members, will vary widely depending on the project. Some varying factors would include:

(1) The hourly rate charged to clients for design, multimedia, and programming components will depend on the complexity of the project. A different hourly rate would apply to each component. So for instance; a job may demand complex programming but easy multimedia, and so the programming rate would be set much higher than the multimedia rate.

(2) Also, there could be projects that demand, for example, many more hours of labor from the designer than of the multimedia specialist or programmer, and vice versa.

Basically, they are struggling with the issue of how to set up a compensation system that guarantees each member a fair return for their contributions — which may, depending on the jobs they get, end up being grossly disproportionate to other members’ contributions.

– Eliana, North Carolina

Answer

You have a complicated setup here, but it is possible.

Guaranteed payments are the way in which LLC members are compensated for their labor contributed to the LLC.

I have seen LLC operating agreements where members agree on a set guaranteed payment for each member, with bonuses determined at the end of the year based on productivity of each member. This is common among professional practices (medical offices, law firms, etc.)

In a law firm, for example, each member/partner would take a year-end bonus based on some formula related to billable hours. In a medical practice, it could be based on revenue generated from patient billings minus the member’s proportionate share of expenses.

I would think a similar model could apply to web development.

While nearly any conceivable compensation arrangement can be written into your operating agreement, the important thing is that what is written is what each person had in mind.

Secondly, you’re going to want quality accounting software that lets all the members see exactly what their efforts earned and what expenses were associated with their earnings.

For example, you could have a business where one member brings in 50% of revenue, but uses 80% of expenses. He might claim 50% of profits, but the other members might object, pointing out that he generated more expenses than revenue, and therefore should be entitled to a smaller share.

You need to decide:

1. How revenue is counted.
2. How expense are allocated between the partners.
3. How to value “intangible” value added to the company.
4. When this performance based compensation is paid (at the end of each month, annual bonuses, etc.)

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