Business Planning Assignment 5 Steven Adamson

Current Findings-

You asked whether a Carl could be paid an employee salary? The short answer is Yes. Technically, an
IRS rule stipulates that LLC members cannot be paid employees, they can receive salary-like payments
called “guaranteed payments,” which unlike distributions are paid to a member partner whether the
entity makes a profit or not—just like an employee salary.

However, there are some wrinkles that one needs to be aware of. LLC are taxed on a pass-through basis
for federal income taxes; each owner pays taxes on his “distributive share” of the income. . Unlike
distributions, entities make guaranteed payments to a partner whether the entity makes a profit or not.
It factors into the performance of the entity, so that to the extent any net income isn’t paid out to the
owners as a guaranteed payment, this excess net income is typically divided among the owners as a
distribution. On the other hand, guaranteed payments are not subject to employer-side payroll taxes
and are treated as self-employment income

As to the tax consequences, the member must include the guaranteed payment as ordinary income, and
the LLC may claim an ordinary deduction with respect to the payment unless the services provided by
the member are capital in nature. For other purposes, however, a guaranteed payment is treated as a
distributive share because the payment is made with respect to a transaction in which the member is
acting in a capacity as a member of the LLC. This is not readily apparent, and therefore, further legal
research needs to clarify precisely whether a guaranteed payment paid to Carl and/or Bev would be
treated as ordinary income or as a distributive share.

Moreover, if Carl demands an guaranteed payment for the hours he works at the restaurant, then his
equity stake in the business or distributive share should be reduced accordingly, because his risk is lower
than the other partners. Bev and Ann should accordingly be afforded a greater equity stake based on
this enhanced risk, although these are decisions for the partners to make.