FORM A DUAL CLASS LIMITED LIABILITY COMPANY
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|OUR GOAL—YOUR Complete Satisfaction and UnderstandingOur goal is to provide each of our clients with as much information as possible about starting a Dual Class Limited Liability Company. As you will see as you review the following material, there is a lot of information to digest and consider. Many legal aspects may be complex and confusing. We want you to know we are available to speak with you about any legal aspects of the formation of your Dual Class Limited Liability Company at your convenience either over the telephone or in person at the Spiegel and Utrera, P.A., office nearest you. |
WHAT’S AN LLC?
The Limited Liability Company (“LLC”) is a hybrid entity that is very flexible and, depending on how many owners (known as “Members”) and what such Members elect to do, may be taxed as a partnership or corporation, if it has multiple Members, or as a sole proprietorship, if it has only one member, while providing limited liability protection for all of its Members. For federal tax purposes, an LLC, like a partnership or sole proprietorship, is a pass-through entity; thus, its income and losses are taxed only at the member level. However, all members of an LLC, like the shareholders of an S corporation, have limited liability for the debts and claims against the LLC. No member will be burdened with the personal liability.
The main advantage of the LLC is that it is not burdened with the ownership restrictions imposed on a small business corporation (also known as a Subchapter S Corporation). An LLC may have more than 100 Members or as few as one. Its interests may be held by corporations, partnerships, Non Resident Aliens, trusts, pension plans and charitable organizations; the LLC may make special allocations, thereby avoiding the single class of stock requirement applicable to an S corporation; and it may own more than 80% of the stock of a corporation and, therefore, may be a member of an affiliated group.
The Members of the LLC become owners of the Company by putting capital (making a “Capital Contribution”) into the Company in exchange for a Membership Interest, which is expressed as a percentage. Typically, the allocation of profits and losses are proportionate to the Membership Interest. The Capital Contribution can be money, real estate, equipment, future service (“sweat equity”) etc., and if it is something other than money, it should be assigned a value agreed upon by the Members. For example, Bill and Mike want to set up a company to operate a retail athletic goods store. Bill puts in $51,000 and Mike will work 60 hours next year managing the store and his sweat equity will have an agreed upon value of $49,000
The LLC is operated by Managers that handle the day-to-day activities of the LLC. The Managers may be all of the Members, some of the Members, or it may even be managed by a person or entity that has no ownership interest in the company. Since such a non-Member Manager will not share in the profits and losses, perhaps they will be paid a salary or commission as agreed upon in a Management Agreement.
WHAT'S A DUAL CLASS LLC
The Dual Class LLC is a special type of LLC that follows proposed IRS
regulations which allow an LLC to be deemed analogous to a limited
partnership for Federal Income Tax purposes. The Dual Class LLC is
structured to admit both active, management-providing members (“General
Members”) in addition to more passive, capital-contributing members
(“Limited Members”). In doing so, the members/owners acting solely as
limited partners are not subject to the Self Employment (“SE”) tax.
THE SELF-EMPLOYMENT TAX RATE IF CURRENTLY 15.3%. THE RATE CONSISTS OF TWO
PARTS: 12.4% FOR SOCIAL SECURITY AND 2.9% FOR MEDICARE
. To make
your LLC a Dual Class LLC requires a customized Dual Class Operating
Agreement which is just $300 if ordered at the time of forming your LLC.
Here’s how it works. The Spiegel & Utrera, P.A. Dual Class LLC is divided as
Class A General Member Units:
The smaller manager class receives a
priority preferred return of income (for example, a management or sales fee
arrangement) that is contingent on the profitability of the LLC. As such, it
may not be a fixed compensation amount or it will constitute a guaranteed
amount, which is prohibited.
Class B Limited Member Units:
This portion of the LLC membership
interests is the cash-contributing members’ interest and is structured as a
non-manager class qualifying for limited partner status. This class receives
a cumulative preferred-priority return of profits based on their unreturned
capital contributions, whereas the smaller active manager class would not.
EXAMPLE FOR A ONE MEMBER DUAL CLASS LLC
For example, assume in a single member Dual Class LLC with just one
member, the member may be assigned as much as 66 2/3% of its ownership to
the non-manager class qualifying for limited partnership status. This class
then receives a cumulative preferred-priority return of profits based on
their unreturned capital contributions thereby avoiding the SE tax on 66
2/3% of this members’ interest in the Dual Class LLC. The remaining 33 1/3%
percent is subject to SE Tax as it would be assigned to the smaller manager
class which would be assigned to the smaller manager class which would
receive a preferred-priority return of income (for example, a consultant,
management or sales fee arrangement that is contingent on the profitability
of the LLC.) As such, it may not be a fixed compensation amount or it will
constitute a guaranteed amount, which is prohibited.
EXAMPLE FOR A MULTI MEMBER LLC
For example, assume a Dual Class LLC with more than one Member. The SE Tax
savings are at least equal to the One Member Dual Class LLC. However, the SE
Tax savings may be as much as 100% for a Member depending upon the degree of
active participation by that Member in the Dual Class LLC.
FORM YOUR DUAL CLASS LLC ONLINE NOW!
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