Discussion:Balance Sheet Equity Section of New LLC
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Discussion Forum Index --> Tax Questions --> Balance Sheet Equity Section of New LLC
| 8 September 2006 | |
| A new company (restaurant) forming an LLC electing to be treated as a corporation (then elect S status) has 3 passive investors each investing $50k each. (There will be 3 active managers running the day-to-day operations and they want to collect a management fee (salary). The 3 passive investors would like to get their money back in 3 years (yeah right ) and then remain owners after that.
How best do you go about structuring the equity section of the balance sheet so tax benefits are maximized? Is it better to classify the $150k from the passive investors as common stock (capital stock) or should some of it be recorded in Additional Paid In Capital? I know there is something about Small Business Stock and if the company goes broke before the pay back, then the loss on the stock can be recognized as an ordinary loss instead of a capital loss?? Also, when the investors get their investment returned the only dividends that are taxable would be any distributions that exceed each Shareholder’s basis I assume? If S Corporation, then no double taxation issues I think. I don’t think the 3 active managers will be contributing any capital, just time which they will be compensated for. At any rate, forgive my obvious ignorance in this area? Any expertise would be greatly appreciated on how to structure the equity section of the balance sheet. Maybe they should structure themselves as an LLC treated as a Partnership instead of a Corporation?? A new company (restaurant) forming an LLC electing to be treated as a corporation (then elect S status) has 3 passive investors each investing $50k each. (There will be 3 active managers running the day-to-day operations and they want to collect a management fee (salary). The 3 passive investors would like to get their money back in 3 years (yeah right ) and then remain owners after that. How best do you go about structuring the equity section of the balance sheet so tax benefits are maximized? Is it better to classify the $150k from the passive investors as common stock (capital stock) or should some of it be recorded in Additional Paid In Capital? I know there is something about Small Business Stock and if the company goes broke before the pay back, then the loss on the stock can be recognized as an ordinary loss instead of a capital loss?? Also, when the investors get their investment returned the only dividends that are taxable would be any distributions that exceed each Shareholder’s basis I assume? If S Corporation, then no double taxation issues I think. I don’t think the 3 active managers will be contributing any capital, just time which they will be compensated for. At any rate, forgive my obvious ignorance in this area? Any expertise would be greatly appreciated on how to structure the equity section of the balance sheet. Maybe they should structure themselves as an LLC treated as a Partnership instead of a Corporation?? | |
| September 8, 2006 | |
| Sec. 351 requires that all the initial contribution is, in fact, capital stock. No debt. Now, 60 days later...it could be debt. As long as investments are the same, either a corp or LLC would work. The sec. 1244 rules about ordinary losses apply automatically now, so no worries. Either LLC or S lets the losses pass back to the extent of investment, and either one technically would permit any profits to come back free of SE tax since they're not providing services. I'd vote for the S, just since it's simpler to handle. BUT I would make the three active managers officers so that I could enter Officers Salaries on that 1120S without fear of getting mail from IRS wondering why the owners have no salaries... | |
| 8 September 2006 | |
| JR1 - Thank you for the IR Code Section References. I will look at those. I personally prefer S Corp over LLC electing to be treated as an S Corp). However, if the client insists on LLC then as long as they have the attributes of a corporation instead of a partnership then we should still be able to use the S Corporation via the LLC, (I think) | |
| 8 September 2006 | |
| I think the operating losses passed back to the investors would be considered passive and therefore not deductible until later. | |
| September 8, 2006 | |
| Ohh, interesting point about the losses, since they're not active players. Still not thinking there'd be a difference between LLC and S, tho'...I have a feeling that one day, those active workers will become owners, and that really lends well to the corp. set up. Doing that in partnerships is icky at best. | |
