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February 16, 2019

How To Pay Yourself As The Owner Of An LLC

I’m a single member LLC with a question about owner draws.

What is the difference between owner’s draws and guaranteed payments? I take a draw each month based on the net profit in the LLC for the month so the amount varies month-to-month. How is this treated in the LLC and are the owner’s draws considered income to me? If so, do I have to pay income taxes on the owner’s draws? If they don’t show as part of my income and are not taxable, can I show them as income to a mortgage co. for the purpose of refinancing?

Thank you in advance for your assistance.

– Susan, Connecticut

Answer

Some definitions first:

A ‘draw’ is a withdrawal of the LLC’s earnings. A member usually won’t take a draw unless there are profits.

A ‘guaranteed payment’ is money that a member takes out of the business whether there is a profit or not.

For income tax purposes you are charged with recognition of your LLC’s profits regardless of your draws. Tax recognition and flow of money are two separate things in an LLC.

Example:

If the LLC made a $20,000 profit, then you will report it through your Schedule C if the LLC is taxed as a sole proprietorship. You DO NOT report that same $20,000 a second time due to the fact that you withdrew it during the year as the owner’s draw.

In terms of showing your income to a bank, you can show them copies of your tax return which will have your Schedule C (or if you’re a multi-member LLC, copies of the 1065 and K-1).

 

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How to pay owner of the LLC in single member LLC?

Hi,

I am the owner of Single Member LLC. The LLC is basically a consulting firm.

I have placed my self to the client side for project work through my own LLC.

I have confusion regarding my salary process.

1) How can I pay my self?

2) Do I need to run payroll for myself with the help of payroll company? or just write a check from my business checking account to my personal checking account and then use the amount for my self from there?

3) Which is better and safe way to use money for myself?

4) which way to get paid (Payroll or Direct Check from business to personal) will be give me more tax benefits?

5) if I would like to write checks from business checking to personal checking for my self, then how the tax withholding will work out? how do I need to pay taxes?

Your responses are highly appreciated.

Thanks in advance for your help.

Answer

Assuming you are the sole member of the LLC, and the LLC is taxed as a sole proprietorship, partnership or disregarded entity (as opposed to a corporation), you do not pay yourself using a W-2 payroll system.

Instead, you can take a draw of the LLC’s profits.

The LLC will write a check from the LLC’s bank account, payable to you personally, which you deposit in your personal bank account.

As far as taxes, there will be no FICA or withholding taxes on a draw.

Instead, you, personally, will be required to calculate quarterly estimated federal and state taxes and pay them on your own.

FICA and Medicare taxes (aka “payroll” taxes) will be paid when you file your annual 1040 tax return. They are what is known as “self employment taxes”.

As a self-employed person, you should consider investing in quality personal accounting and tax software such as Quicken and TurboTax, which will help with the quarterly estimated taxes and annual self-employment taxes.

Comment
I recently began paying myself from my LLC. I went online and transferred funds minus taxes (my accountant gave me that amount) to my personal account. Then I showed a minus near the check register that I had done that. My accountant says I cant do that and that I must write a check! Is that true and why? thanks!Art

Answer

As long as there’s a trail–electronic or check–I don’t see why paying yourself electronically is any worse than paying via check.

Did your accountant explain why?

Comments for How to pay owner of the LLC in single member LLC?

Thank You so much….

by: Anonymous

Thank you so much for your response. I appreciate it.
I have another question after your answer:


1) if I write check to my personal checking account from Limited Liability Companies Business Checking Account, is there any limit on amount of money or frequency of withdraw money in certain time period? For example, if I earn $10,000 every month, can I write check to my personal checking as per my need ($1000 sometimes or $50,000 sometimes) or I must need to maintain certain limits on amount on every checks? or number of checks per month?

Do I must need to maintain certain consistency on flow of money from my business checking to personal checking…? Or it’s on my own….?

Instead of saving the money in my personal checking or saving if I kept the amount in business checking or saving only and write checks to my personal checking as per my need, then what difference it makes?

At the same time the payroll (Salary) of any consultant working from my company will be count as expenses of company, how it will consider in my case as I’m the owner plus consultant and also not running payroll for my own and just writing checks?

I will also post this question on the site. Thanks in advance for your help.

Response

The process of taking draws rather than running payroll is supposed to be simpler…but look at all the questions! 🙂

Here’s a simple breakdown.

Your company earns revenue by selling products or services.

It then has certain expenses–rent, payroll (for all employees EXCEPT YOU–you are a member, not an employee), utilities, office supplies, advertising and so on.

Revenue – Expenses = Profit.

You, as member/owner can withdraw the profit in any amount, in any frequency, so long as you clearly indicate that these are draws.

Draws are not “expense” and you do not deduct draws from your LLC’s revenue. Draws are simply distributions of profits from the LLC to its owners–the members.

The LLC will calculate its profit or loss for tax purposes via form 1065 if it is a multimember LLC taxed as a partnership; or a Schedule C if its a single member LLC taxed as a disregarded entity.

For a multimember LLC, each of the LLC members will be issued a K-1 reflecting that member’s proportionate share of profit or loss to be recorded as taxable income on their personal tax returns (in the case of a loss, it becomes a deduction on their personal return).

For a single member LLC, the LLC’s profit/loss will be calculated on Schedule C of the sole member’s 1040 tax return, and the profit/loss either adding to or subtracting from the individual’s taxable income.

If you’re wondering where payroll taxes (also known as FICA and Medicare tax) come in–you didn’t think you could avoid payroll taxes that easily, did you–they are calculated on Schedule SE. They are no longer referred to as “payroll taxes” in this context, but instead as “Self Employment” tax.


Paying yourself in an LLC

by Mike
(baltimore, MD)

When paying myself in my small business LLC, can i simply make online transfers to my personal checking account?

If so, how often will you recommend i do this throughout the course of the year.

Also, what if I want to put money into the checking account of the LLC for whatever reason…Anything I need to know in terms of how the IRS see’s this? My concern is the IRS and making sure i don’t get into any trouble on both questions.

Your site has been a blessing….

Thank you.

Answer

A blessing. Thank you very much for the compliment.

I get a TON of questions about how money should flow between the owner of an LLC and the LLC itself.

Let’s start with the overall picture, from 30,000 feet up. A limited liability company and its owner are two separate entities. Just like you and your neighbor are two separate entities. Just like you and you employer are two separate entities.

Veil piercing, and the IRS “problems”, you alluded to, occur when you, as owner of an LLC, ignore this foundational truth and treat your LLC’s bank account like your own.

Now, it’s true that all the profit of the LLC belongs to its members (and if you’re the sole member of a single member limited liability company, then all the profits belong to you). And yet, there are still formalities that must be followed to respect the separate existence of you and the company.

Putting Money In Your LLC
Whenever you put money in the limited liability company, you must explain what that money “is”.

Is it a loan?
Is it a capital contribution?

If it’s a loan, you will need a simple promissory note, executed by the limited liability company, promising to repay the loan. Yes, I know that YOU are the only member of the llc, so why sign a note to yourself? Because your LLC is not the same as you, even though you control it.

This is a strange concept, I understand, but just think of your LLC the way you think of your employer.

Would you write a check to your employer, to be repaid at a later date by them, without some written document? Of course not.

Same with your limited liability company.

Taking Out Your Profits

As a member of a limited liability company, you are entitled to withdraw your profits at any time, in any amount, in any number of transactions.

And you should, since you’ll be paying taxes on your LLC’s profits whether you take a distribution of profits or not.

Furthermore, understand that you must pay quarterly estimated taxes. This is not unique to being a member of an LLC–every taxpayer must make quarterly estimated taxes.

As an employee, your employer withholds quarterly estimated taxes for you from each paycheck.

As a business owner–whether LLC, sole proprietor, s or c corporation, or partnership–you must make quarterly estimated payments yourself.

See IRS FORM 1040-ES to calculate your estimated tax payments.

You might want to take out enough of your profits each month so that it adds up to enough to pay your quarterly estimated taxes, and then withdraw the remainder at the end of the year. This will require careful budgeting, however.

The other method is to withdraw your profits in equal monthly installments.

If your business is seasonal, you might want to make other arrangements, taking less in the good months and more in the slow ones.
Question From: Lotus Flower

For a single-member LLC, do you also need a promissory note to yourself when making a capital contribution from your personal account to the LLC? Or, what is the proper documentation procedure for this?

Response
If it is a capital contribution, then you do NOT use a promissory note. Rather, that capital contribution is counted as equity in the company.

If a member loans personal money to the LLC expecting to be repaid, then that should be memorialized with a written promissory note.


Return to Ask A Question About LLC Taxes.

What are the Rules & Regulation for writing Checks to Personal Checking from Business Checking for a Single Member LLC?

Hi,

This is Mehul again. I am an owner of a Single Member LLC, which is currently operation as consulting firm.

I have placed my self to the client side for Project work through my own LLC as an employee of LLC.

I asked you ” How to Pay my self for my work on client site?”
You responded ” I need to write a check of LLC’s Profit to my personal checking account from LLC’s business checking account and count estimated Federal/State Tax and pay them on my own.”

I have some questions on your answers as shown below:

1) How the Profit will be count for LLC? I am not sure how much amount I should consider as Profit for LLC from now apart from my salary as this is just a Starting period of LLC’s Income? I am not having count of all the expenses of LLC yet.

2) If I write a check to my personal checking account from LLC’s business checking account, is there any rules & regulation, I need to keep in mind or need to take care of?

3) when i write checks to my personal checking accounts, Is there any limits on amount of money or frequency of withdraw money for certain time period?

3.1) for example: If I earn $10,000 every month from client Project, and I might collected $100,000 in business checking account, Can I write a check to my personal checking account as per my need ( sometimes $1000 in one month, and sometimes $50,000 in one month)?

3.2) or I must need to maintain certain limits on amount on every check?

3.3) or number of checks per month?

3.4) Do I must need to maintain certain consistency on flow of money from my business checking to personal checking every month? or its on my own as per my need?

4) Instead of saving money in my personal checking/saving, if I keep all the money in business checking/saving only and withdraw by writing checks to my personal checking as per my need, then what difference it makes in both the scenario?

5) at the same time the Payroll ( Salary) of any consultant who is working on client site as an employee of my LLC, will be count as an expenses of LLC, then how it will consider in my case as I am the owner plus consultant for my LLC and also not running Payroll for me and just writing checks to my personal checking account?

Your response is highly appreciated.

Thanks again in advance for all your help.


Return to Ask A Question About LLC Taxes.

Paying LLC owners a bonus with minimal tax impact?

Is it possible to avoid additional tax burden by paying the owners of a LLC a incentive pay for staying or making a company profitable?

Would this reduce tax burden?

Or is it better to use the additional profit and instead of paying a bonus or incentive pay buying a tax deduction (car) for the owners?

Answer

As far as minimizing tax in the pass-through tax treatment for the LLC, you’re going to want to maximize your business expense deductions.

Payments to the active owners of an LLC are not a business deduction–it’s a distribution of profits.

Therefore, find a way to make a deductible business expenditure that is also of benefit to the owners. I’m sure you can think of something.

For entities taxed like a corporation, salaries paid to employees (including a shareholder), are deductible, but of course, taxable to the employee (along with the corporation’s portion of FICA/Medicare taxes).

You mentioned “incentive pay”. In corporations, the IRS has limited the deductibility of salaries above $1 million. The only way to pay an employee (usually a CEO or other C-leve executive) more than $1 million per year and still take a business deduction is to make it “incentive based”.

If this is your issue, then you have enough money to afford an attorney and accountant, which I would highly recommend.


Return to Ask A Question About LLC Taxes.

How best to “pay self”, employees, in single member LLC

by Bean
(Provo, UT)

Hi, thanks so much for your help and information.

My question concerns the best way to structure my small business for budgeting to pay employees and myself in a single member LLC in which I am the sole member.

My understanding is that, as a single member LLC, the pass-through taxation feature allows me to pay taxes on the profit as part of my personal tax return so I don’t need to file separately for the company.

Does it make sense to pay employees (as well as all other company expenses), then pay taxes once on what’s left as income?

At that point the net income is essentially my income, and I could essentially take out what I wanted from it, right?

Or does it make more sense to pay myself as one of the employees?

Or none of the above?

Thanks so much for any advice you can provide!

Answer

Pay your employees using a payroll system…meaning, hire ADP, or some other service such as Quickbooks Payroll, to handle withholdings for your employees.

NEVER TRY TO DO PAYROLL ON YOUR OWN!

Unlike other business debts, as owner of your company, you are personally liable for unpaid payroll taxes and withholdings.

The IRS does not need to pierce the corporate veil in order to hold you liable–you simply are liable under federal law.

Same goes for state taxes.

As an employer you are an unpaid tax collector for the IRS, and if you don’t do your job, you not only fired but fined.

I also think these payroll tax debts are not dischargeable in bankruptcy (and bankruptcy has become very unattractive for debtors since the credit card companies got their bill passed into law a couple years ago).

Therefore, don’t fool around with payroll taxes–use a service like ADP or Quickbooks Payroll.

As the sole member of the LLC, you do not want to put yourself on the payroll.

Instead, you take distributions of the LLC’s profits. Your LLC’s profits are calculated as revenues – expenses (rent, utilities, advertising, employee payroll, etc.). You will report your LLC’s profits on Schedule C of your 1040 as a single member LLC (or a C or S corporation if you made that election — fixed per the comment below). Your LLC is taxed net of all expenses, which includes payroll to employees.

You can take profit distributions according to any schedule that fits your company’s cash flow. Be sure to distribute enough profits to yourself to pay your estimate quarterly taxes.

You can determine your estimated quarterly taxes using Form 1040-ES (think “EStimated”).

If you are also holding a “day job” (with a W2 and withholdings) in addition to running your LLC, then you need to factor in the withholdings from your day job. Otherwise, you’ll overpay and get a big refund when you file.

You will report your LLC’s profits on Schedule C of your 1040 as a single member LLC, or a Form 1065 + K-1 if you are taxed as a partnership instead of a disregarded entity.

A single member LLC can not be taxed as a partnership. It can be taxed as a C or S Corporation by election.


Return to Ask A Question About LLC Taxes.

Adjusted Gross Income and personal payment.

Does paying the business owner get deducted from the gross business earnings?

Answer

If your LLC is not taxed as a corporation, then payments to the owner are distributions of profits. Therefore, they are not deducted from the business earnings.

However, you also don’t report the owner’s draws as income to the owners. Instead, the gross business earnings are passed through to the owners as provided by the LLC’s operating agreement. Don’t double-count your draws and end up paying taxes twice.

 

How to classify myself under an llc so that at the end of the year I don’t pay FICA on my dividends?

How do I to classify myself under an llc so that at the end of the year I dont pay FICA on my dividends? I had heard there is a way to accomplish this!

Answer

There are several ways of doing this (but still see a tax adviser anyway).

1. One method is to apply for taxation as an S corporation. When you receive a dividend from an S corporation, you do not pay FICA taxes on the dividends. The downside? The IRS requires that you be placed on the S corporation’s payroll, and receive a “reasonable” salary. And, of course, that reasonable salary is subject to FICA.

2. Self-employment tax is never owed on interest, dividends, capital gains, rental income, royalties, S-corporation profits, limited partnership income, IRA distributions, pension distributions, Social Security, or any excluded income.

3. There are advisors who say that a passive investor in an LLC (a passive member of the LLC) might be considered a “limited partner” (see above), and therefore exempt from SE tax. The IRS has not issued any regulations on this, so there is some risk if you are audited. Also, to be a “limited partner” in your LLC, you can’t have managerial control or actively participate in the LLC. You would need to have a manager operating your LLC.

Remember too that you get a deduction of one-half of your share of FICA taxes paid, so it’s really no different from being an employee when everything shakes out. In addition, your employer probably sets your salary level taking into consideration the employer’s share of FICA).

Comments for How to classify myself under an llc so that at the end of the year I dont pay FICA on my divdends?

by: GaryS


Do/should FICA taxes be paid quarterly? I’m a partner in a small LLC startup. It’s always been my understanding that I pay taxes on LLC profits at the year’s end based on my K-1. Does that apply to FICA as well?

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February 10, 2019

Can an LLC Owned by Husband & Wife Change Tax Filing Status?

We have owned our business since 2004 and are an LLC owned by husband and wife. I am the majority owner (75%) and my wife has 25% ownership. We currently file with one joint personal return and one for the LLC taxed as a partnership. We have not filed for this year but want to change our filing status to be a disregarded entity. Can I elect a disregarded entity and file only one return? The LLC was formed in Delaware and we are residents of Delaware and the business is located in Massachusetts. If so, is there anything special I need to do given that we filed separate business and personal returns previously?

Answer

Use IRS form 8832, Entity Classification Election, to elect to have your LLC taxed as a disregarded entity (the only limited liability companies eligible for such treatment are single-member LLCs and LLCs where the only two members are husband and wife):

http://www.irs.gov/pub/irs-pdf/f8832.pdf

An LLC with at least two members will be classified as a partnership by default unless Form 8832 is filed with the IRS and elects to be treated as a corporation. Also, a single-member LLC is automatically a disregarded business entity taxed as a sole proprietorship unless Form 8832 is filed and the corporation status is elected.

Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.

In your situation, it’s too late to elect disregarded entity status for last year’s return. However, you can file your Form 8832 to elect disregarded entity status going forward. Attach a copy of your Form 8832 to your partnership tax return when you file it.

QUESTION
Is there any reason to continue to do the separate returns? Is there any other reason to do it besides the obvious administrative benefits?

Answer

If you are a married couple and file joint personal tax returns, I can’t think of any reason why your tax situation would change going from partnership taxation (where you and your spouse are the only members of the LLC) to disregarded entity status.

So yes, the advantage of the disregarded entity status is the administrative benefits.

The only advantage to keeping it separate, and this is an “advanced” topic, is that as a disregarded entity, your income and expense statements are on your Schedule C, as opposed to a separate form 1065. Now, there are tax advisors who speculate that you are less likely to be audited if you file as a partnership using form 1065 rather than as a disregarded entity using

Schedule C. The statistics do somewhat support that view.

One thing to keep in mind is whether the LLC is in a community property state. LLCs owned by a husband and wife in (AZ, CA, ID, LA, NV, NM, TX, WA, & WI) can treat their LLC as a disregarded entity for federal income tax purposes if: the LLC is wholly owned by the husband and wife as community property under state law and not taxed as a corporation. This often means that each spouse would file a joint tax return with a Schedule C.

That said, even the “increased” chance of audit using a Schedule C is about 2% (meaning, you have a 2% chance of being audited in any particular year).
With proper records and receipts, an audit should be nothing to fear. Furthermore, many audits are conducted through the mail and do not involve an IRS agent physically rummaging through your desk drawers and files.

The administrative benefits of disregarded entity status accrue each year, while the chance of an audit is slim (you have a 98% chance each year of NOT being audited).

The choice is ultimately yours but you may want to engage a CPA to fully discuss the options.


Return to Ask A Question About Single Member LLCs.

Can a Single Member LLC be owned by Husband and Wife in A Community Property State?

For tax purposes, can an LLC whose only members are husband and wife be treated as a single member LLC in a community property state (CA)?

Answer

For income tax purposes, an LLC owned solely by husband and wife can be treated as a single member limited liability company. This includes the election as a disregarded entity.

Whether the limited liability company is formed in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, & WI) is not relevant for this purpose–LLCs in all states can elect single member LLC status if owned by a husband and wife who file their income taxes jointly.

Of course, being in a community property state will obviously have an impact on the distribution of the LLC membership interests in the event of a dissolution of the marriage.

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March 28, 2018

How Do I Remove My Name From A DBA Partnership I Have With Another Person?

I obtained a DBA with my brother in law to form a drywall business. I found out that he was doing some things that weren’t right by me (keeping funds for his own use vs paying the material bill with the funds).

I want to be rid of him. He is forming a bad name for me with less than perfect work, not to mention the embezzlement! How do I remove my name from a business partnership / DBA and get my own? I would like to become an LLC.

Answer

Do you two have a written partnership agreement, or are you simply doing business together?

Assuming you have a written partnership agreement, you can follow the procedures therein.

Otherwise, as “de-facto” business partners, you’re going to have to determine what your state’s requirement is for revoking a DBA. Some states have no dissolution requirements. You will want to notify the IRS and close the EIN account. There may also be a state registration that should be closed as well.

Remember that a DBA is just a way of officially “renaming” an already existing business entity. For sole proprietors, the DBA is “renaming” themselves. John Smith becomes XZY Dry Cleaning.
Moreover, a DBA can also be used as an official alternative name for an entity like a general partnership or corporation. For example, Jack & Jill partnership can be DBA’d to a business name like Superior Water Fetching.

You should examine the DBA filing and figure out if the filing was under your name, your brother’s name, or both names as a partnership. DBAs are typically filed with the county clerk and occasionally with the Secretary of State where the business is filed.

You’ll also want to remove your name from any bank accounts for the business and remove your business partner from access to any of your bank accounts.

You’ll also need to inform, in writing, all of the vendors you use that you will no longer transact business as a part of the partnership and that you are not liable for any orders your former partner places in “your name”.

The legal concept is called “apparent authority”. If you and your partner have held yourself out to the public as being a partnership, then if your partner orders supplies, you are going to be liable.

The only way to protect yourself is to send a letter (keep a copy for yourself) to each supplier and tell them that you have dissolved the partnership and that your former partner cannot place any orders in your name, and that he has no authority to act on your behalf and that you have withdrawn from the partnership.

That letter would destroy any expectation in a supplier’s mind that you are agreeing to be liable for these orders.

General partnerships are dangerous because if a partner goes “rogue” and starts buying things in the partnership’s name, and then doesn’t pay the suppliers, the other partner is personally liable.
If you have a big line of credit, this could be tens of thousands of dollars.

Unlike someone slipping and falling at your store, there is no insurance you can buy against a partner’s illegal activities, and this happens more often than you think.

There have been many lawsuits between and among partners–both when times are good (each wants a bigger share of the pie) and when times are bad (each points the finger at the other as the cause of the problems).

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March 27, 2018

What Is The Difference Between An LLC Membership Agreement versus Operating Agreement

Is there a difference between an LLC Membership Agreement and an LLC Operating Agreement? Thank you. Based on some quick research, they seem to be the same thing.

Answer

They are the same thing.

While many states do not require a Limited Liability Company to have an Operating Agreement, it is nonetheless a good idea to have one drafted.

Regardless of whether the state you form your LLC in requires an Operating Agreement, if your LLC consists of multiple members, it is imperative that your LLC has a written Operating Agreement.  A single-member LLC is not typically as important, but not a bad idea to draft one.

RocketLawyer has a free Operating Agreement that you can fill in with your information.  Start on it here.

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March 27, 2018

Do You Need To Include “LLC” In Your Logo And Advertisements?

Do you need to include “LLC” in your logo and advertisements as long as it is included in the legal name of the company?

Answer

No. The letters “LLC” or Limited Liability Company are not required to be in your logo or even on your business cards.  Is it a good idea to include it?  Yes, usually. Having the LLC show up on the marketing materials make your business look more credible.

The issue is that most people don’t like the look of LLC or Limited Liability Company on their marketing materials.  Some attorneys will strongly encourage a company to use the LLC designation on all materials.  If that is the case and you want to be safe, you can choose to register a DBA (doing business as) which is sometimes known as a fictitious business name or assumed name.  Sole proprietors or partnerships are commonly required to register a DBA if their business name is different from their full first and last name.  Then you have officially registered the use of the company name without the LLC.  Usually, the cost to do this is under $100 and typically a one-time fee.

Even if you aren’t required to use it, I would ensure that all your legal documents–meaning contracts, leases, purchase orders, etc.–use your full LLC’s legal name and that you sign any documents in your capacity as a member of the LLC and not personally.

In other words, you should sign as “Jenny Smith, Member XYZ, LLC.” and not merely as “Jenny Smith”.

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March 25, 2018

Can I Start A Second LLC From The Same Home Office I Am Running The First LLC From?

I already have an LLC that I am running from a home-based office, with myself listed as the registered agent at the same address. Can I start a second business as an LLC and run it from the same address and home office and list myself as the registered agent at my home address for the second LLC, in the same way, I did the first? Would this pose any problems?

Answer

Yes you can:

  1. Have the same person as the registered agent for many LLCs (and corporations, too).
  2. Have many LLCs (or businesses for that matter) can share the same registered office.

One caveat is that if you want to keep liability separate for these multiple LLCs, be sure that you treat them as separate entities. That means that they each have their own bank accounts (obviously), if one entity owns a piece of equipment, the other entity doesn’t use it without paying a rental charge, don’t mix money between the two (don’t deposit a check made out to LLC A into LLC B’s bank account, for example).

It is not uncommon at all for many different companies to all use the same address as their registered agent address.

One notorious example is 1209 North Orange Street in Delaware. According to a New York Times article, there are more than 285,000 (yes, more than one quarter million!) companies “headquartered” at the nondescript, one story office building.

  285,000+ corporations and LLCs are headquartered at this single location in Delaware.

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March 21, 2018

Is There A Danger Of Using My Home Address As The Registered Agent?

When forming an LLC my home address was used as there was no office space as yet to list. Will this compromise the LLC and enable anyone to claim against the home address in case of loss?

Answer

The short answer is no.

You can use your home address for an LLC as the use of a home address alone as your registered agent address will not cause your corporate veil to be pierced.

Piercing the corporate veil is an extreme remedy, and it usually takes multiple factors–including fraud by the owners/officers of the entity–to cause a court to pierce the veil.

The biggest disadvantage to listing your home address is that you will now get a ton of junk mail to your home because your LLC filing is public knowledge and marketers can purchase a list of newly formed companies.

Every state has a website where any person can search the name of a corporation or limited liability company and see, at a minimum, the registered agent address. Some states further require annual filings listing the officers of a corporation or LLC, and that information is also public.

But at A minimum, your registered agent address is always publicly visible. Furthermore, most states let anyone view the change history to an LLC’s registered or resident agent. If you want to keep your connection to an LLC private for some reason, then you should use an outside provider as your registered agent and not your home address.

Also, if your company is ever sued, the summons will be served at your home, which might cause embarrassment.

For example, I had a client who was sued in federal court by an out-of-state bank on a defaulted business loan, and the bank decided to have the US Marshall serve the summons instead of using a private process server. The client was obviously upset, scared and embarrassed as her neighbors saw federal agents in marked vehicles outside her home and in this world, people are likely to think she did something criminal rather than a mere lawsuit on a business loan.

While many businesses are operated out of the home and there isn’t a separate business address, it may make sense to use a registered agent service. These services provide a business mailing address. In some states, you can use a mailbox service, but a PO Box address is never allowed. Many states though require a physical address and/or registered office where there is a person who can sign for documents if they get served to the business. Be sure to check your states LLC rules and regulations.

If you initially started with your home address, you can always change your registered agent to one of the many registered agent services available in every state. They usually charge anywhere from $75-$200 per year, depending on the level of services provided and who you choose to use.

Some LLC formation services like IncFile offer a free registered agent trail when you sign register your LLC through them.

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March 19, 2018

How Do We Pay Out Distributions To Members?

In an operating agreement for an LLC do you have to spell out exactly how and when the distributions to members are paid out or do you have to pay out your profits as they are incurred?

Example: Can I state in my operating agreement that I will pay out a certain dollar amount per month, starting on a particular date (i.e. beginning in year 3) until the member’s entire investment has been repaid plus an additional dollar amount (say double what they have paid in) and then can I make a particular date and a particular dollar amount to buy them out?

This way I know my exact cash flow to investors.

I understand that they will pay taxes on the profits of the business, but is that regardless of how much I actually distribute to them (I do know that they won’t pay taxes on return of contribution or basis) or do I need to pay them consistent with the profits of the company in addition to their return of contribution?

Thanks for this forum, these are burning questions.

– Lori, Colorado

Answer

You can (and should) definitely spell out in exacting detail in your Operating Agreement how the LLC members will be paid.

Also, a Limited Liability Company that is taxed as a partnership is permitted to distribute cash ‘unevenly’ (an amount disproportionate to the member’s ownership interest).

Remember that a member of a pass-through entity does not pay taxes based on money distributed to them, but on their proportionate share (known as pro-rata share) of the LLC’s profits or losses. An LLC is permitted to distribute losses differently among the members –e.g. a member with a 1% interest can take 90% of the tax losses in a particular year.

This can be spelled out in your LLC operating agreement.

Similar to a single-member LLC, a multi-member LLC that is taxed as a partnership or S corporation, does not pay taxes on net income.  Instead of the entity paying taxes, the pass-through taxation is reported on each member’s IRS K-1 form. The amount on the K-1 can be the same or different from the amount distributed.

You can distribute money to investors even if you don’t have profits (or, conversely, you can distribute less than the full amount of profits). These payments can be characterized as interest on a loan, or as guaranteed payments.

Once you get multiple classes of members, with different allocations of profits and distributions, you really ought to get the advice of an attorney or accountant. These are not the type of operating agreements to draft on a napkin after reading something on the internet.

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March 19, 2018

Transferring Single Member LLC To Another Person

My business is a single-member LLC – 100% ownership is mine. I would like to transfer complete ownership to someone else (relative). Can I just make a transfer document and do it or do I have to redraft the operating agreement?

What other requirements are there for transferring ownership of an LLC?

Answer

To transfer ownership of the entire LLC, there are a few things you need to do:

  1. Assign your interest in the Limited Liability Company to the buyer. This involves the transfer of ownership through the membership interests of the LLC. At a minimum, draft a resolution of the members of the LLC approving the sale of the interest.
  2. If you have one, amend the Operating Agreement to add the buyer as a member and remove the seller as a member. Many states, such as Arizona, don’t require a written Operating Agreement, especially for single-member LLCs.
  3. Each state has a process for updating the members of record. Some will have a form to file upon the date of the change of ownership, while other states update the names of the members on the annual report.
  4. A buy-sell agreement will be needed that outlines transaction, along with a list and price of the assets that are being transferred, the sales price of the business and any other relevant details regarding the sale of the business. This information is needed for the IRS as there are tax implications for both the buyer and seller.
  5. Last, with the change in ownership, a new EIN will be needed for the new owner.

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March 18, 2018

Managing Member vs Member

In a LLC structure, is there a difference between being called or titled a Managing Member vs being titled or called Member?

– Spencer, New York

Answer

All Managing Members are Members, but not all Members are Managing Members.

Managing Members are those specifically able to bind the Limited Liability Company contractually. In the legal world, they have “actual authority” to contract on the LLC’s behalf.

Members may or may not be able to bind the LLC contractually, and doctrines like “apparent authority” and “actual authority” come into play. If the member is authorized as an agent to execute contracts on behalf of the LLC, the member is said to have actual authority. However, a member who does not have actual authority can nonetheless bind the LLC if that member has apparent authority.

The Managing Members should be the people who are transacting the business of the LLC and should be thought of like the executives of the LLC as they are actively involved with day-to-day operations. Not all LLCs will have a Managing Member.

Another aspect of being a Managing Member vs a Member is the extent of fiduciary duties. Depending on how the operating agreement is written, a Managing Member may have more responsibilities (and possibly liability) than just being a Member. This can vary by state too, so be sure to verify.

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