Understanding Multi-Member LLC as a Disregarded Entity for Tax Purposes

Thanks for this info. If we did switch to an S-Corp, would we have to dissolve our current LLC first? Also, would we lose any liability protection by changing how we're taxed?

You don't need to dissolve your LLC to elect S-Corporation tax treatment. The LLC remains your business entity for legal purposes, but for tax purposes, it would be treated as an S-Corporation. This is called a "check-the-box" election and it's purely a tax classification change. Your liability protection would remain exactly the same since you're keeping the LLC structure. The only things that change are how you file taxes and how you handle payroll. You'd need to run payroll, file quarterly payroll taxes, and pay yourselves reasonable salaries before taking distributions.

Does it actually work with complex situations? My brother and I have a multi-member LLC but we also have rental properties in separate LLCs and I'm wondering if it can handle multiple entities with different ownership percentages.

I'm skeptical of these AI tools. How does it compare to just hiring a good CPA? Seems like they'd know all these strategies already without needing software.

It absolutely works with complex situations. The tool allows you to input multiple entities including rental properties and different ownership structures. It actually specializes in analyzing how these entities interact from a tax perspective and identifies optimization opportunities across your entire business portfolio. The difference from just hiring a CPA is that you get instant analysis based on your specific numbers, and you can run multiple scenarios yourself before talking to your accountant. Many users actually share the reports with their CPAs who appreciate having the data-driven analysis. It doesn't replace a good accountant but gives you a solid understanding of your options before making decisions.

How does this service actually work? Does it just hold your place in line or something? I'm confused how they can make the IRS call you when I can't even get through myself.

This sounds like BS honestly. Nothing makes the IRS move faster. I've been trying to resolve an issue for 8 months and they just don't call back no matter what. Hard to believe any service could change that.

It's actually pretty straightforward - they use an automated system that waits on hold for you and navigates the IRS phone tree. When someone at the IRS finally answers, their system immediately connects that person to your phone number. So it's not magic - you're still in the same queue, but you don't have to personally wait on hold. The reason it works is because they have technology that persistently redials and navigates the system, which most people don't have the time or patience to do themselves. I was skeptical too, but I literally had an IRS agent call me while I was making dinner, and she answered all my LLC classification questions in detail.

I did this last year. The main advantage is saving on self-employment taxes by taking reasonable salaries plus distributions. But be aware of the additional compliance requirements - quarterly payroll filings, additional tax forms, etc. Also, if you have losses in the business, they can be harder to pass through to your personal return compared to partnership taxation.

Thanks for sharing your experience. That's helpful to know about the loss limitations - we've been profitable for the last few years, but I hadn't considered what would happen if we had a down year. Do you think the self-employment tax savings justified the additional complexity and compliance costs? And roughly what percentage did you set as "reasonable salary" versus distributions?

Interesting idea but wouldn't there be tax consequences from selling the ownership interest? Like capital gains or something? And what about if both members want to maintain ownership for liability reasons?

Yes, there could definitely be tax consequences from selling the ownership interest - potentially capital gains depending on the value of the business versus the original investment. It's not a solution for everyone. If maintaining shared ownership is important, you could explore creating a single-member LLC owned by one person, and that person could grant profit interests or other compensation arrangements to the other party. This gets complicated quickly though and would require consulting with both a tax professional and business attorney to structure properly.

This is really helpful, especially the specific numbers breakdown! I'm curious though - when you say "reasonable salaries," how do you determine what's actually reasonable? Is there a specific formula or percentage the IRS expects, or is it more subjective? Also, did you find that the quarterly payroll filings were manageable to do yourself, or did you need to hire a payroll service? I'm trying to weigh the compliance burden against the potential tax savings.

Great question about reasonable salaries! The IRS doesn't provide a specific formula, but they generally expect salaries to be comparable to what you'd pay an employee doing similar work in your geographic area. I used salary data from sites like Glassdoor and PayScale for marketing professionals in my area. As a rule of thumb, many tax professionals suggest 60-70% of net profits as salary, but it really depends on your role and local market rates. The key is being able to defend your decision if audited. For payroll, I initially tried doing it myself using QuickBooks Payroll, which costs about $45/month for two employees. It's definitely manageable - you just need to run payroll each pay period and file quarterly forms (941 and state equivalents). The software handles most of the calculations and filings automatically. If you're not comfortable with it, payroll services like Gusto or ADP run about $80-120/month but handle everything for you. Given your projected savings, either option would still leave you significantly ahead financially.

That sounds like a solid decision! I'm in a similar situation with my business partner - we're running a small consulting firm and have been debating between staying with partnership taxation or making the S-Corp election. Your breakdown of $45k salaries with the remaining as distributions is really helpful as a reference point. One question: did your CPA mention anything about the timing of when to file Form 2553 for the S-Corp election? I've heard there are specific deadlines you need to meet for it to be effective for the current tax year, and I want to make sure we don't miss any important cutoff dates if we decide to go this route. Also, would love to hear how the QuickBooks Payroll experience goes - we've been hesitant about managing payroll ourselves but the cost savings compared to a full service make it tempting.