LLC Member Buyouts
What are this risks in LLC member buyouts? Chicago business lawyer Brian J. Thompson cautions LLC members considering a membership interest buyout to consider the risks involved when the buyout agreement provides for money to be paid in the future. Agreeing to accept payments in the future exposes the separating member of an LLC to several forms of counterparty risk. This counterparty risk has 2 components:
1) Default risk – the counterparty simply chooses not to perform as agreed in the buyout or separation agreement; and
2) Credit risk/bankruptcy risk – the counterparty is unable to perform due to insolvency or bankruptcy.
Corporate shareholders take on the same risks noted above when they agree to accept payment at a later date.
Chicago business lawyer and CPA Brian J. Thompson strongly encourages those considering an LLC member buyout to consider the default risk and credit risk. For these reasons, it is important to receive as much of the proceeds of the LLC buyout in cash at closing.
Starting your own Limited Liability Company or corporation? Chicago business lawyer Brian J. Thompson wants you to know that officers, directors and controlling shareholders who leave one corporation to start a competing enterprise need to beware of the corporate opportunity doctrine. A corporate opportunity refers to any business opportunity that becomes known to an officer or director of a corporation due his position within the company. The corporate opportunity doctrine holds that the directors, officers and controlling shareholders have a duty of loyalty to the corporation and cannot to take such opportunities for themselves without first disclosing the opportunity to the board of directors of the corporation and getting permission from the board of directors. Failure to follow this procedure can be a violation of the duty of loyalty. As a result, the corporation may be entitled to a constructive trust of all profits obtained from the violation of the corporate opportunity doctrine. Contact Chicago business lawyer and CPA Brian J. Thompson for to form your Illniois LLC or Illinois S-Corporation.
Illinois S Corporations
What are the tax characteristics of Illinois S corporations? First of all, single-member LLCs are disregarded entities for purposes of federal taxation unless the LLC makes an S election. As a result, a single-member LLC’s income and loss are reported on Schedule C of the member’s IRS Form 1040. Furthermore, all of the income is subject to federal employment taxes. If your single-member LLC has income of several hundred thousand dollars, this can result in substantial FICA taxes as explained below.
Social Security or FICA taxes include two separate taxes. One is the Social Security tax and the other is Medicare tax. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current tax rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the social security tax for that year. For 2013, this base was $113,700. There is no wage base limit for Medicare tax. Thus, the 2.9% Medicare tax applies to all wages without limit.
Additional Medicare Tax
Beginning January 1, 2013, an Additional Medicare Tax of 0.9% applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers withhold the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year. The Additional Medicare Tax applies only to the employee, to the employer.
When properly structured, S corporations can be useful in minimizing your social security taxes. So, consider setting up an S corporation to pass through the S corporation’s income free of employment taxes. If you are considering setting up an S corporation, contact Brian@BrianThompsonLaw.com.