Business Structure

UPDATED: Sep 30, 2022

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Business Structure

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.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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