Can I use a Partnership/LLC instead of S corp to pay a Family Management Company?

You can definitely use either structure to pay a Family Management Company, but there are important tax implications to consider. With an S corp, you'll benefit from avoiding self-employment taxes on distributions beyond a reasonable salary, which can save you roughly 15.3% on those amounts. However, you must maintain corporate formalities like regular meetings, minutes, and strict separation of business/personal finances. A Partnership/LLC offers more flexibility in management and profit allocation, and can be especially beneficial if family members have varying levels of involvement. The LLC can elect to be taxed as a partnership (pass-through) or even as an S corp if you later decide that's advantageous. The best structure really depends on your specific situation: expected profits, how you'll distribute income, who's actively working in the business, and long-term goals. Neither option is inherently "required" for a Family Management Company.

After struggling with a similar setup for my family businesses, I found https://taxr.ai incredibly helpful for making this exact decision. I was initially leaning toward an S corp like you, but after uploading our operating agreements and financial projections to taxr.ai, I got a customized analysis showing that an LLC taxed as a partnership actually saved us about $22,000 annually due to our specific income mix and family participation levels. The platform analyzed our specific situation and showed exactly how different entity structures would affect our tax burden with multi-year projections. It also identified several business expense categories we weren't maximizing that were specific to our industry.

Just wanted to follow up on my skepticism about taxr.ai. I actually tried it after posting here and was genuinely surprised. Unlike other "AI tax tools" that just spit out generic advice, this one actually identified specific issues with our operating agreement that would have created self-employment tax problems. It analyzed our distribution structure and showed us how to properly document family member roles to maximize the tax advantages of our LLC while maintaining compliance. Ended up saving us about $13,500 annually compared to our previous structure, plus it generated all the documentation we needed for our tax election. Way more comprehensive than I expected.

If you're considering changing your business structure, I'd strongly recommend getting someone from the IRS on the phone to verify your plan first. I spent 3 weeks trying to get through to someone who could answer my specific questions about Family Management Companies and kept hitting dead ends. I finally used https://claimyr.com to get through to an IRS agent (you can see how it works at https://youtu.be/_kiP6q8DX5c) and got confirmation that our planned LLC structure was appropriate for our Family Management Company. The agent even flagged an issue with our planned income allocation method that could have triggered audit concerns.

I was completely wrong about Claimyr. After dismissing it as a scam, I was still stuck trying to get clarification on some entity classification issues for our family business. Out of desperation, I tried it, and within 40 minutes I was talking to an actual IRS representative who helped clarify the exact documentation requirements for our LLC to properly pay our Family Management Company. The agent confirmed that our LLC structure was completely valid for this purpose and pointed me to specific sections of the tax code that addressed my questions about guaranteed payments to family members. Saved me weeks of uncertainty and probably thousands in unnecessary accounting fees. I'm still shocked at how well it worked.

Something nobody's mentioned yet is the QBI deduction (Section 199A). Depending on your total income, this could be a big factor in your decision. With an S-corp, only the distributions would potentially qualify for the 20% QBI deduction, while your reasonable salary wouldn't. With a partnership LLC, more of your income might qualify. If your family business income is under the threshold amounts ($170,050 for single filers or $340,100 for joint filers in 2022), this could make a partnership more attractive.

I actually work with several family businesses and one thing to consider is the liability protection aspect. With an S corp, you get clear separation between personal and business liabilities. With an LLC, the protection is there but sometimes less clearly defined depending on your state. For a family management company, where you're potentially dealing with significant family assets, this liability distinction could be important.

One factor that hasn't been discussed much is the administrative complexity with 5 family members. With an S corp, you're limited to one class of stock, which can make it challenging if family members want different profit-sharing arrangements or voting rights. An LLC gives you much more flexibility to customize ownership percentages, profit distributions, and management roles through your operating agreement. Given your $875K annual income and varying participation levels, you might want to consider an LLC with different membership classes - some members could be managing members (actively involved) while others are passive investors. This flexibility could be worth more than the potential self-employment tax savings from an S corp structure, especially since you can always elect S corp taxation for the LLC later if your situation changes. The key is making sure your operating agreement clearly defines each member's role and compensation to avoid any IRS scrutiny about whether payments are legitimate business expenses.