The previous page described how profits and losses are allocated among Members, as well as the mechanism for distributing cash or other assets. This page will discuss strategies for compensating an LLC's Managers and Members.
By way of contrast, the officer/shareholders in a closely held corporation may distribute company profits to themselves in one of two ways. First, they may pay themselves salaries which reflect their relative contributions to the company. E.g. it is expected that the President of a corporation will perform more critical services, and will receive a higher salary than, a vice president.
Second, corporations may pay dividends on their stock. In this case, each share receives an identical amount, e.g. $1. Thus, a person who holds more shares receives a larger portion of the aggregate dividends, regardless of position or work performed.
Partnership accounting works to provide the same ultimate benefits, but through somewhat different accounting mechanisms and using different terminology.
*Note that an LLC may elect to be treated either as a corporation or a partnership for tax and accounting purposes. This discussion assumes that the LLC has chosen to be treated as a partnership.
Salary vs. Draw
LLCs offer the ability to customize compensation and other terms to meet highly specific situations, and in that sense offer significant benefits over corporations in many situations. Our attorneys have extensive experience forming and advising LLCs to meet a wide variety of business objectives. Please contact one of our attorneys for consultation regarding LLC compensation strategies or other issues.