Guaranteed Payment and L.L.C.

General Real Estate Investing
1

Hello to all reading this post. I have some questions about the guaranteed payment and the L.L.C. I hope that the tax professionals in the forum can provide some help

  1. Is the guaranteed payment based upon actualized profits or projected profits?

  2. Should the guaranteed payment be distributed prior to acquiring the property (projected profits based on appraisals) or should the guaranteed payment be distributed after the sale of the property (actualized profits remaining after paying fees and taxes at closing)?

  3. What is a good percentage of actualized or projected profits should the guaranteed payment be based upon?

Thanks to all for the feedback

2

you can’t pay anything without cash.

“projected” profits are meaningless. If that were the case I’d just project profits all day long and be way way retired by now.

what the LLC pays is up to the LLC.

‘guaranteed payments’ is a technical term that has a very specific meaning in tax code. generally you’d be better to take a plain old distribution from profits.

3

Thanks for the information McWagner. I gather from your response that the guaranteed payment cannot be based on projected profits. It can only be distributed based on the profits that the L.L.C. actualizes upon the sale of a property. The remaining profits is dispersed via the percetages relating to the allocation of profits between the members of the L.L.C. Additionally, can you explain why it is better to take a plain old distribution. The reason I will like you to explain is based on the following information.

I have read and spoke to individuals that state that the guaranteed payment incorporated into the L.L.C. structure offer the following benefits:

  1. The guarantee payment can be claimed as a tax deductable expense for the L.L.C. thus reducing taxable profits.

  2. The I.R.S. is starting to crack down on L.L.C.'s for not paying members that performing services via a salary or guranteed payment

3)The guaranteed payment is subject to self-employment taxes for the member peforming services. The profit distributions for member in the L.L.C (2 members or partnership stucture) are not subject to self-employment tax rates and are treated as “flow-through income” subject to ordinary tax rates.

I am presenting this information not to challenge your expertise, but to gain understanding. I don’t want to structure the L.L.C.'s fiscal opertions incorrectly. Thank you

4

your understanding is correct.

5

Thanks for the confirmation McWagner.