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Q: operating agreement vs. employment agreement ( Answered,   0 Comments )
Subject: operating agreement vs. employment agreement
Category: Business and Money > Small Businesses
Asked by: hiroller949-ga
List Price: $25.00
Posted: 04 Feb 2005 22:39 PST
Expires: 06 Mar 2005 22:39 PST
Question ID: 469246
I recently created a Calif. LLC and sold 49% of the business to
another person.  I assumed that my new partner would receive 49% of
the monthly profits from the time this agreement was signed.  Our
attorney is now putting together and employment agreement though, and
one of the items it asks for is what salaries we are paying ourselves.
 My question is whether these salaries can be and are often arbitrary,
or are they usually equal to the % of ownership?

If so, I am curious what exactly the % of ownership signifies then,
other than the person's share if the company is bought or sold.  
Thanks for any assistance.
Subject: Re: operating agreement vs. employment agreement
Answered By: taxmama-ga on 07 Feb 2005 15:56 PST
Dear Hi Roller,

You're asking a question that, like most tax issues, 
can be answered many ways.

First of all, as an LLC, if you file as a partnership, you may actually 
have three different percentages for the owners at the same time:

1) The ownership percentage
2) The profit sharing percentage
3) The loss sharing percentage

Take a look at Section L of the Schedule K-1 to see what I mean.

(Some partners can't use losses at all, while others can...there's some
excellent opportunity for tax planning here.)

I recommend that you sit down with your attorney AND your 
tax professional (accountant, CPA, enrolled agent) to discuss
the many ways you can use this special provision both between
the two of you, and to bring on new employees. There are things
you can do with an LLC that won't quite work with anything else.
(Knowing how to use it is why we get the big bucks.)

Now, that said, none of that has anything to do with salaries.

Salaries are related to the amount of time, work, income or other
contribution each of you make to the business. They are an excellent
way to equalize payments between partners where one only invests the
initial capital and the other one does all the work. 

Or where one partner (actually, they're called 'members') would be
earning substantially more if s/her kept his or her job, you could
pay such a partner a commission on the sales they generate (as payroll),
while other partners are paid a salary or hourly wage for the work
they do. 

Then, after the payroll, the profits are split by the agreed-upon percentage.

If you structure salaries with foresight, you can eliminate many of the
resentments and jealousies that often plague unbalanced business teams.
And the business will thrive. This discussion time is also an excellent
time to define your expectations of each other. 

So, do sit down with your financial team to plan out this decision. 
Your attorney brought up an excellent question at just the right 
point in your business.

Best wishes

Your TaxMama-ga
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