LLC Compensation

[mming]

What type of compensation does the owner of an LLC usually receive - is it W-2 wages or some other type? Also, are there any quirks to what LLC compensation can be used for qualified plan purposes (in the way, e.g., how sub-s corps. should only use W-2 wages and not the pass-through income for calcs.)?

[Blinky the 3-eyed Fish]

A very high percentage of LLC's are taxed as partnerships and so earned income is compensation for the owners. If however, it is taxed as a corporation, then the owners' W-2 wages are compensation.

[Bird]

Apparently a fair number of LLCs taxed as partnerships are incorrectly paying their members on W-2s. In that case I say "It ain't right but it's your accountant's problem not mine" and use the W-2 plus the profits, adjusting the profits for 1/2 SE tax and member contributions.

[mming]

Thank you for your quick replies. So, unless they're taxed as corps. and receive W-2 wages, owners/partners of LLCs, as well as partnerships, (and LLPs, I imagine) get their net income apportioned between plan contributions, 1/2 SE tax and their compensation for plan purposes, similar to how you would handle a sole prop. OK, I think I got it.

[Effen]

A very high percentage of LLC's are taxed as partnerships

Interesting? I thought it was just the opposite. Maybe that is what Bird is saying as well. I wonder if there are any real statistics on this.

I guess the bottom line is you need to ask.

[katieinny]

Speaking of LLCs, I have a question about how it's determined that one member of an LLC has terminated service. One member left and set up his own business. He hasn't performed services for, nor has he had income from the first LLC for several months. He wants to move his plan assets from the LLC's plan into his new plan, but he's being told that there is no basis for distribution because he hasn't terminated service. Isn't it enough that he hasn't performed services and hasn't received income? How does any sole proprietor or partner show that they have separated from service?

[Blinky the 3-eyed Fish]

Interesting? I thought it was just the opposite. Maybe that is what Bird is saying as well. I wonder if there are any real statistics on this.

I guess the bottom line is you need to ask.

I tried to look up if there were any statistics but couldn't find anything. I have seen 2 LLC's taxed as corporations in 10 years and 50x that as partnerships, so I was surprised myself that you have different experience Effen.

Regarding the last post, why is whomever saying there is no termination of service? It seems clear to me from your facts there is a termination.

[Bird]

I wasn't commenting on the percentage of LLCs taxed as partnerships vs corps, but yes, I think the norm is to be taxed as a partnership. I don't know why you would bother setting up a limited liability company and then go through the hassle of having it taxed as a corporation; why not just set up a corporation and get limited liability directly?

[katieinny]

Blinky: It seems to be the same situation a sole proprietor has -- he or she can't terminate service. Except in the case of a sole proprietor, there's no other person blocking the way when a sole proprietor stops working. In this case, the other Member is causing problems. So how does an LLC member get a distribution if he isn't retirement age, and hasn't died or become disabled, and the plan doesn't allow for in-service distributions?