Ask HN: LLC/S-Corp for web dev shop ownership + salaries?

1 points by mungojerie 12 years ago | 2 comments

My business partner and I are both designer/developers launching a small devshop (or "agency", if you're feeling spinny).

We've talked to CPAs, hit up Avvo.com, and two lawyers, and remain confused.

We anticipate assets (code and products) that we want to co-own. But we also anticipate contributing different time and talents to projects. We can't predict, but we don't expect to split dev time 50/50. And we expect that one of us will bring in more business than the other.

We need a legal entity that will allow us to do this: - split ownership of assets evenly

- split decision-making evenly

- pay each person for time worked on a project, based on hours and a reasonable hourly rate

- pay commission/bonus/something for bringing in business (so if ! deliver a client and he does all work, I still get 10% of that project fee)

Can we form as an LLC, take the S-Corp election, and then pay ourselves an hourly rate (1099?) for work we do and recognize that as a cost-of-business? And then any remaining profits would be either held in the company or paid out as dividends?

Thanks.

kjs3 12 years ago |

IANAL.

I think it's appropriate to enshrine corporate structure & responsibilities, ownership percentages, and asset allocation in the incorporation document. I don't think that's the place for the compensation agreement, because it's much harder to change (e.g. has to be filed with the State). I think the right thing would be to have an LLC agreement covering incorporation, and individual employment contracts for each partner to cover compensation matters. That way they can be changed easily based on consent of all parties.

HOWEVER: This leaves you open to one partner not consenting to change an unexpectedly unfair situation. Include in the incorporation agreement a mechanism to resolve such disputes, as well as a mechanism to remove a partner for cause. A lawyer can provide language binding in your jurisdiction.

Oh...yeah. Having an up-front agreement on what happens if a partner gets paid out, but at a later time there's a claw-back from the customer, is a good idea.

And I agree with jesusmichael: you probably don't want to 1099 an owner/partner. Kinda defeats the purpose. I think a periodic distribution based on individuals work product is allowed, but I recall there are rules about how and how often you can do it. A tax accountant can explain all the details and options. IANAA(accountant).

jesusmichael 12 years ago |

Ok to answer your questions in order.

1. Any corporate structure will allow you to split evenly. 2. See #1 3. See #1

4. If you 1099 yourself you're defeating the purpose of the S-corp election... would prevents being taxed twice. You can either take periodic distributions or pay yourself as employees of the LLC. Either way you'll have to pay taxes