Apologies for this long-winded question in advance. So here is a situation that I heard about from a realestate friend that I’m advising- a company (multi-member LLC) was profitable last year. For simplicities sake I will say there are 3 members, person A who owns 50%, person B who owns 45% and person C who owns 5%. So on the profit (minus operating expenses of the company and guaranteed payments of the members) they all ended up with our pro-rated share of profit (again for simplicities sake let’s say the company made 500K after GPs and operating expenses, so person A has 250K, person B has 225K, and person C has 5K in their capital accounts). All 3 members were taking the same level of guaranteed payments (100K) to “run the company” and instead of wanting to empty the capital accounts, they all want to use that money to continue to grow the business (i.e. keep it in with little distribution). The tax implications on those members (esp person A and B) is huge because to them it feels like they pocketed 100K in their personal bank account (in guaranteed payments) but their tax bill is on 100K + their capital account (i.e. 100K+250K = 350K for person A). Thus a distribution is needed for them all to cover the taxes on the money that they are willing to leave in the company to allow it to grow.
First Q- is the best way to do this to just take ~40% (tax rate) of their capital account # and distribute a check for that to each member? (i.e. 250K *.4 = 100K check to person A, 90K for person B and 10K for person C).
In that scenario each person is “on the hook” for their own pocketed money (i.e. taxes on their guaranteed payments), but the capital account distribution covers the money that they left in the company to let it grow. Is that best?
Second question, the members now are wondering what to do this next year. Their estimated tax payments are now massive
Person A
100K (guaranteed payment amount) + 250K (capital account) = 350K *40% = 140K total = 35K a quarter
If they are just drawing their 100K guaranteed payment, then person A would obviously not be able to bring in any money and would in fact be losing money if they didn’t draw more money out of the company account (since 140K is larger than 100K).
So what to do?
!) Person A draws their normal guaranteed payment amount (100K for the year) and every quarter the company distributes out the 25K that is due to their 250K capital account estimated taxes)?
2) They bump their guaranteed payments up to a level where they can in essence still pocket a livable wage but also cover the estimated taxes?
Are both possible legally? Is one better than the other? Or is this thinking completely wrong! Thanks so much!!