Self-Employment Tax as Member of LLC?
June 10, 2021
by a searcher from Stanford University - Graduate School of Business in Sausalito, CA 94965, USA
I'm working on a "self funded" acquisition with SBA7 debt. I will have some outside investors. Many searchers structure their deals as LLCs, and as a result, by my interpretation, every member of the LLC has to pay self-employment taxes (15.3%, medicare + social) on their pro-rata share of the pass-through net income at the end of the year. Many business owners elect to file as S Corp to avoid this self-employment tax. However, with outside investors who want to invest via their LLCs, this doesn't seem to work.
Have other searchers using an LLC structure found a way to minimize this self-employment tax? LLC owner of the business, you work for a separate C Corp mgmt. company? 15% on my share of net income in the LLC, even if not making distributions (i.e. putting that NI on the BS for growth / add-ons) is pretty material.
Of course the general transaction could be structured as a C Corp (I've read those threads), but my acquisition is not QSBS eligible so that route loses a lot of its appeal.
Thanks!
from Georgetown University in Houston, TX, USA
You could also structure as an LP to be more certain. For the active investors (such as the sponsors and managers), they could invest through an S corp to take advantage of the reasonable comp exception, but still get pass-through treatment.
from University of Pennsylvania in Houston, TX, USA