A limited liability company, or LLC, has a very unique personality, one that may take some getting used to for Americans. There is the partnership/sole proprietorship and the corporation. And then there is the LLC, which combines the benefits of both of these structures and in effect, is has its own identity. One of the key aspects of an LLC that is so different than in any other business structure is that the terms “shareholders” and “partners” can be tossed out and replaced with “members.”
What this means is a certain amount of great equality or inequality is possible. There can be one member or hundreds – it doesn’t matter, there’s no cap. In fact, a member can be a breathing human being or it can be a corporation. This basic makeup of an LLC is why profit sharing is sometimes hard to understand from the outside.
The owner of an LLC really can go about profit sharing however he or she likes. In partnerships, the profits are split right down the line. But in an LLC, they can be split in any which way. Moreover, an LLC can even be taxed as a corporation, meaning the owner(s) retain more profits. As the owner of an LLC, you basically get to choose how you want it to be taxed and who and where the profits go to.
There are a few pitfalls that come with this structure. First off, while the people up top have more power, this can mean bad news for more minor members. In corporations and partnerships, there is a required organization and while it can complicate and bore a company (who wants to keep meeting minutes?), it can also assure a smoother and fairer operation. Secondly, an LLC can’t live forever. Whenever a member dies or goes bankrupt, the LLC dissolves! That certainly can throw a wrench into an ideal profit sharing plan.
Still, another obstacle exists for LLC members when it comes to profit sharing. If they want to go public, it’s difficult to share profits. Same goes for sharing profits with employees – it’s not a practical move to make with an LLC. If you seek large-scale profit sharing, you probably should set up a corporation, not an LLC.
One important thing to note, however, is that there might be more profits to share in an LLC as double taxation is avoided, without the loss of protection of personal liability! This is of course one of the main reasons to form an LLC as opposed to a normal corporation.
It’d difficult to grasp any single concept with regard to LLC profit sharing, as it will vary from company to company. As it should. A large appeal of an LLC is that it can be managed in any way. This is great news for small companies who function well on their own and are all the more effective and profitable when they are given the reigns and can call the shots.