UPDATED: Sep 30, 2022
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I am setting up an investment firm to invest in startup companies. The money is
coming from myself, not other investors. There will be 2 employees, myself and
one other. Right now we are an LLC and this will be the sole source of income for
me. Should I keep it an LLC and file as an S Corp or incorporate and pay us both a
salary? Which is easiest and tax beneficial?
Asked on May 8, 2017 under Business Law, Colorado
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 5 years ago | Contributor
If the business is an LLC or corporation and if the other employee is an owner (a member of an LLC; a shareholder of a corporation), then he or she will be entitled to a share of any profits or any proceeds from selling the business (if you ever do) proportionate to his/her ownership interest. If that's what you want--him or her to participate in the business and its profit and that's how he/she will be incentivized and paid--then leave the business as an LLC with "partnership" tax treatment, give him or her the appropriate share or interest, and also have a mandatory buyout clause in the operating agreement so that if things don't work, you can buy out/back his/her interest for a previously-defined amount. You and he/she will both be paid from distributions of profit.
If you don't want him or her to participate in profits, distributions, etc. then you should be the sole owner (drawing your own compensation in the form of distributions of profit) and make him or her an employee; have ADP manage the payroll, payroll taxes, and benefits for you.
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