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A small business owner has a number of withdrawal methods available when seeking to minimize the amount of vulnerable assets within the entity by withdrawing funs from the business. One common practice option is the tax code concept of “guaranteed payments” which applies to the multi-owner limited liability company (LLC).  Whether payments for salary, loans and leases constitute guaranteed payments will affect the tax business of each owner, and exactly how the information return of the LLC will report the payments.

Specifically, payments to an owner, on account of his ownership interest, reduce the owner’s tax basis in the LLC. In contrast, payments to an owner for guaranteed payments do not cause a reduction in tax basis, because these payments are made to an owner other than in his capacity as an owner (i.e., as an employee, lender or lessor). If one of the owners also work for the company, guarantee payment would be the best way to agree on funds transfer. A lower tax basis will mean higher taxable gain when the equity interest is later sold. Thus, usually, it is better for the business owners to structure salary, loan and lease payments as guaranteed payments.

In addition, guaranteed payments are deducted, along with other expenses, on the LLC’s information return filed with the IRS. In general, guaranteed payments are payments made to the owners other than in their capacity as owners and without reference to the LLC’s earnings. Hence, payments for salary (if owner work within the company, loans (for other owner or shareholders and leases will usually qualify as guaranteed payments.

Guarantee payment would need to be stated as $ annual amount and may contain benefits and bonuses. If an agreement provided that one owner in a two-owner LLC was to receive a “salary” of 50 percent of the LLC’s earnings, with the other 50 percent allocated to the other owner, this “salary” would be unlikely to constitute a guaranteed payment. But if one owner receive $50K salary, than the LLC will report on its filing to the IRS information return  an income of $X-50K as the business income.

Oren Gulasa