Post by thread:[OT] Business: LLC, Partnerships, taxes, etc (USA)

For those outside the US..can probably ignore. So I have a long term "partner" who brings me in on projects when he needs a board or circuit designed for his clients projects. Its worked well over the years and now he has a product of his own to design and sell. Initially he approached me and asked for a bid on doing the design, and I provided that to him. Then he asked..do you want to just be paid, or have a cut of the profits (always a risk)and honestly my time and materials on the board are about $10, pretty small risk. Now comes the question on tax liability. He wants to form a LLC, with myself and two others. The LLC will purchase the pieces from us...my board, his mechanical part all at 'cost' and then we get paid back from the LLC, as profit sharing. From a tax liability, my costs for parts (no labor) are a tax deduction on my schedule C for the consulting business, and then the profit is typically my design and build time, very straight forward but its all under my company name. Now that the LLC is thrown in...I wonder how the IRS looks at me selling something to the othe LLC, and then taking back profits. Either the LLC pays me direct for the costs, and then takes in profit sharing above that but it seems just slighty odd and not sure completly legal to do. Just wondering if anyone else has been involved in something like this. Of course the obvious answer is...talk to a tax attorny but figured I would try to get some idea from the list...as there are several smart business folks on here as well.

alan smith wrote: {Quote hidden}> For those outside the US..can probably ignore. So I have a long term > "partner" who brings me in on projects when he needs a board or circuit > designed for his clients projects. Its worked well over the years and now > he has a product of his own to design and sell. Initially he approached > me and asked for a bid on doing the design, and I provided that to him. > Then he asked..do you want to just be paid, or have a cut of the profits > (always a risk)and honestly my time and materials on the board are about > $10, pretty small risk. Now comes the question on tax liability. He > wants to form a LLC, with myself and two others. The LLC will purchase > the pieces from us...my board, his mechanical part all at 'cost' and then > we get paid back from the LLC, as profit sharing. From a tax liability, > my costs for parts (no labor) are a tax deduction on my schedule C for the > consulting business, and then the profit is typically my design and build > time, very straight > forward but its all under my company name. Now that the LLC is thrown > in...I wonder how the IRS looks at me selling something to the othe LLC, > and then taking back profits. Either the LLC pays me direct for the > costs, and then takes in profit sharing above that but it seems just > slighty odd and not sure completly legal to do. > > Just wondering if anyone else has been involved in something like this. Of > course the obvious answer is...talk to a tax attorny but figured I would > try to get some idea from the list...as there are several smart business > folks on here as well. IANATA, the following is just my opinion, etc etc... :) It seems to me, that what you proposed would be completely legal. The LLC is a separate entity from your physical person, so the LLCs can conduct business, even if they share members. For a thought experiment, take it to an extreme. Say there are two LLCs, each with 100 members, and you happen to be a member of both. First LLC makes a gadget that is a critical component in a Second LLC's product. Would the IRS force you to sell your share in one of the LLCs, or force the two LLCs to merge? Unlikely. Or consider a situation where you are a member of First LLC, and your spouse is a member of Second LLC. There's clearly a conflict of interest as far as IRS is concerned, right? Where would they draw the line -- immediate family, cousins, relatives twice removed? If I were in this situation, I would not give it a second thought as to the legality of such arrangement. Vitaliy

I'd get my money upfront. If you have an arrangement like this, you will be forever wondering if you are being screwed... and you probably are... --Bob A On Mon, May 11, 2009 at 12:16 PM, Vitaliy <spam_OUTspamTakeThisOuTmaksimov.org> wrote: {Quote hidden}> alan smith wrote: >> For those outside the US..can probably ignore. So I have a long term >> "partner" who brings me in on projects when he needs a board or circuit >> designed for his clients projects. Its worked well over the years and now >> he has a product of his own to design and sell. Initially he approached >> me and asked for a bid on doing the design, and I provided that to him. >> Then he asked..do you want to just be paid, or have a cut of the profits >> (always a risk)and honestly my time and materials on the board are about >> $10, pretty small risk. Now comes the question on tax liability. He >> wants to form a LLC, with myself and two others. The LLC will purchase >> the pieces from us...my board, his mechanical part all at 'cost' and then >> we get paid back from the LLC, as profit sharing. From a tax liability, >> my costs for parts (no labor) are a tax deduction on my schedule C for the >> consulting business, and then the profit is typically my design and build >> time, very straight >> forward but its all under my company name. Now that the LLC is thrown >> in...I wonder how the IRS looks at me selling something to the othe LLC, >> and then taking back profits. Either the LLC pays me direct for the >> costs, and then takes in profit sharing above that but it seems just >> slighty odd and not sure completly legal to do. >> >> Just wondering if anyone else has been involved in something like this. Of >> course the obvious answer is...talk to a tax attorny but figured I would >> try to get some idea from the list...as there are several smart business >> folks on here as well. > > IANATA, the following is just my opinion, etc etc... :) > > It seems to me, that what you proposed would be completely legal. The LLC is > a separate entity from your physical person, so the LLCs can conduct > business, even if they share members. > > For a thought experiment, take it to an extreme. Say there are two LLCs, > each with 100 members, and you happen to be a member of both. First LLC > makes a gadget that is a critical component in a Second LLC's product. Would > the IRS force you to sell your share in one of the LLCs, or force the two > LLCs to merge? Unlikely. > > Or consider a situation where you are a member of First LLC, and your spouse > is a member of Second LLC. There's clearly a conflict of interest as far as > IRS is concerned, right? Where would they draw the line -- immediate family, > cousins, relatives twice removed? > > If I were in this situation, I would not give it a second thought as to the > legality of such arrangement. > > Vitaliy > > >

LLCs are separate entities only in the eyes of the particular state(s) where they are registered. Note that all LLCs are state registrations and come under laws that vary widely from state to state. The IRS tends does NOT recognize LLCs for tax purposes, so they treat all "members" of an LLC as an ordinary partnership for federal tax purposes only. Look at the state regs, most are no doubt online. Regards/Roger, in Bangkok On Tue, May 12, 2009 at 5:36 AM, Bob Axtell <.....engineerKILLspam@spam@cotse.net> wrote: {Quote hidden}> I'd get my money upfront. If you have an arrangement like this, you > will be forever wondering > if you are being screwed... and you probably are... > > --Bob A > > On Mon, May 11, 2009 at 12:16 PM, Vitaliy <spamKILLspammaksimov.org> wrote: > > alan smith wrote: > >> For those outside the US..can probably ignore. So I have a long term > >> "partner" who brings me in on projects when he needs a board or circuit > >> designed for his clients projects. Its worked well over the years and > now > >> he has a product of his own to design and sell. Initially he approached > >> me and asked for a bid on doing the design, and I provided that to him. > >> Then he asked..do you want to just be paid, or have a cut of the profits > >> (always a risk)and honestly my time and materials on the board are about > >> $10, pretty small risk. Now comes the question on tax liability. He > >> wants to form a LLC, with myself and two others. The LLC will purchase > >> the pieces from us...my board, his mechanical part all at 'cost' and > then > >> we get paid back from the LLC, as profit sharing. From a tax liability, > >> my costs for parts (no labor) are a tax deduction on my schedule C for > the > >> consulting business, and then the profit is typically my design and > build > >> time, very straight > >> forward but its all under my company name. Now that the LLC is thrown > >> in...I wonder how the IRS looks at me selling something to the othe LLC, > >> and then taking back profits. Either the LLC pays me direct for the > >> costs, and then takes in profit sharing above that but it seems just > >> slighty odd and not sure completly legal to do. > >> > >> Just wondering if anyone else has been involved in something like this. > Of > >> course the obvious answer is...talk to a tax attorny but figured I would > >> try to get some idea from the list...as there are several smart business > >> folks on here as well. > > > > IANATA, the following is just my opinion, etc etc... :) > > > > It seems to me, that what you proposed would be completely legal. The LLC > is > > a separate entity from your physical person, so the LLCs can conduct > > business, even if they share members. > > > > For a thought experiment, take it to an extreme. Say there are two LLCs, > > each with 100 members, and you happen to be a member of both. First LLC > > makes a gadget that is a critical component in a Second LLC's product. > Would > > the IRS force you to sell your share in one of the LLCs, or force the two > > LLCs to merge? Unlikely. > > > > Or consider a situation where you are a member of First LLC, and your > spouse > > is a member of Second LLC. There's clearly a conflict of interest as far > as > > IRS is concerned, right? Where would they draw the line -- immediate > family, > > cousins, relatives twice removed? > > > > If I were in this situation, I would not give it a second thought as to > the > > legality of such arrangement. > > > > Vitaliy > > > > > > --

On Mon, May 11, 2009 at 12:16 PM, Vitaliy <EraseMEspamspam_OUTTakeThisOuTmaksimov.org> wrote: {Quote hidden}> alan smith wrote: >> For those outside the US..can probably ignore. So I have a long term >> "partner" who brings me in on projects when he needs a board or >> circuit >> designed for his clients projects. Its worked well over the years >> and now >> he has a product of his own to design and sell. Initially he >> approached >> me and asked for a bid on doing the design, and I provided that to >> him. >> Then he asked..do you want to just be paid, or have a cut of the >> profits >> (always a risk)and honestly my time and materials on the board are >> about >> $10, pretty small risk. Now comes the question on tax liability. He >> wants to form a LLC, with myself and two others. The LLC will >> purchase >> the pieces from us...my board, his mechanical part all at 'cost' >> and then >> we get paid back from the LLC, as profit sharing. From a tax >> liability, >> my costs for parts (no labor) are a tax deduction on my schedule C >> for the >> consulting business, and then the profit is typically my design and >> build >> time, very straight >> forward but its all under my company name. Now that the LLC is >> thrown >> in...I wonder how the IRS looks at me selling something to the othe >> LLC, >> and then taking back profits. Either the LLC pays me direct for the >> costs, and then takes in profit sharing above that but it seems just >> slighty odd and not sure completly legal to do. >> >> Just wondering if anyone else has been involved in something like >> this. Of >> course the obvious answer is...talk to a tax attorny but figured I >> would >> try to get some idea from the list...as there are several smart >> business >> folks on here as well. > I see no reason for you to form an LLC or a partnership. You , he and the 3rd guy can have an agreement which disperses profits ( net or gross ) based on a formula. This exposes you to less liability. I recommend getting a cut of the gross revenues. This avoids many questions about what is a legitimate expense ! You simply become an expense to the product. Gus

Thanks for all the feedback. Bob...I would agree if I had not already been involved with many projects with him, and this was just a natural to come together. I think the LLC is there only as a point of being a business for selling the products. Would you buy from Alan Smith, or from DigiDesigns, LLC ? Sounds a little more legit when its a company...or maybe not. --- On Mon, 5/11/09, Vitaliy <@spam@spamKILLspammaksimov.org> wrote: {Quote hidden}> From: Vitaliy <KILLspamspamKILLspammaksimov.org> > Subject: Re: [OT] Business: LLC, Partnerships, taxes, etc (USA) > To: "Microcontroller discussion list - Public." <RemoveMEpiclistTakeThisOuTmit.edu> > Date: Monday, May 11, 2009, 4:36 PM > Bob Axtell wrote: > ========== > I'd get my money upfront. If you have an arrangement > like this, you > will be forever wondering > if you are being screwed... and you probably are... > ========== > > Alan said that his investment in the board is minimal > ($10), and that he's > been partners with this company for a while -- so I assume > there's quite a > bit of trust in this relationship. > > The ultimate source for this sort of advice is definitely a > tax attorney, > but in my opinion there is absolutely nothing wrong with > the proposed > arrangement, as he described it. > > Vitaliy > > --

alan smith wrote: > Thanks for all the feedback. Bob...I would agree if I had not already > been involved with many projects with him, and this was just a natural to > come together. This is the best type of business relationship you can have. A lot of times, contracts aren't worth the paper they're written on. > I think the LLC is there only as a point of being a business for selling > the products. Would you buy from Alan Smith, or from DigiDesigns, LLC ? > Sounds a little more legit when its a company... Plus, an LLC shields your personal assets, in case someone decides to sue you. AND, as a corporation you will end up paying less in taxes, compared to an individual or a partnership. Vitaliy

Vitaliy wrote: > Plus, an LLC shields your personal assets, in case someone decides to sue > you. AND, as a corporation you will end up paying less in taxes, compared to > an individual or a partnership. Only partially true. The "corporate veil" can be "pierced" in a number of ways, the most common way being proving "gross negligence", which has a different meaning under the law than "negligence". Limited Liability Corporations are useful tools, when needed, to do exactly what they say... limit Liability. But no corporation's officers get a "free pass" just because they did something "for the company" instead of on their own. There are limits to the limits. :-) A good example of how an LLC is useful, is straight out of my life right now... aircraft "ownership". The LLC owns the aircraft, and the "partners" (you NEVER want to describe an LLC as a "partnership", once you've done that -- you can open yourself up to that "veil piercing", and partnerships are a completely different legal entity than an LLC) own the corporation. Now if one of the Corporation's owners goes out and starts dropping Baby Grand Pianos on people one day, my personal assets (including my HOME) aren't at any significant risk of becoming part of the lawsuit from the dead people's families. Does ANY of that mean I won't be named in the lawsuit and have to pay HUGE legal fees anyway? No. In the real world, EVERYONE gets named. The LLC kicks in LATER... when the judge tells me and my lawyer there's no possible claim against my assets, the lawyer has proven I wasn't involved, and ONLY THEN I walk away. The lawyers always get paid, no matter what... :-) Nate

Nate Duehr wrote: >> Plus, an LLC shields your personal assets, in case someone decides to sue >> you. AND, as a corporation you will end up paying less in taxes, compared >> to >> an individual or a partnership. > > Only partially true. The "corporate veil" can be "pierced" I thought to myself, that someone would inevitably bring this up. :) I remember our lawyer telling us about some of the ways to help prevent the piercing of corporate veil: always add "LLC" to the company name when using it, even in everyday business; don't mix company finances with personal finances; try to create the impression that you're a real company by "wearing many hats" and avoiding the impression that you're not a company... etc. :) > A good example of how an LLC is useful, is straight out of my life right > now... aircraft "ownership". The LLC owns the aircraft, and the > "partners" (you NEVER want to describe an LLC as a "partnership", once > you've done that -- you can open yourself up to that "veil piercing", > and partnerships are a completely different legal entity than an LLC) > own the corporation. Do you belong to a flight club? {Quote hidden}> Now if one of the Corporation's owners goes out and starts dropping Baby > Grand Pianos on people one day, my personal assets (including my HOME) > aren't at any significant risk of becoming part of the lawsuit from the > dead people's families. > > Does ANY of that mean I won't be named in the lawsuit and have to pay > HUGE legal fees anyway? No. In the real world, EVERYONE gets named. > The LLC kicks in LATER... when the judge tells me and my lawyer there's > no possible claim against my assets, the lawyer has proven I wasn't > involved, and ONLY THEN I walk away. > > The lawyers always get paid, no matter what... :-) Indeed. Vitaliy