I'm working on a "self funded" acquisition with SBA7 debt. I will have some outside investors. Many searchers structure their deals as LLCs, and as a result, by my interpretation, every member of the LLC has to pay self-employment taxes (15.3%, medicare + social) on their pro-rata share of the pass-through net income at the end of the year. Many business owners elect to file as S Corp to avoid this self-employment tax. However, with outside investors who want to invest via their LLCs, this doesn't seem to work.
Have other searchers using an LLC structure found a way to minimize this self-employment tax? LLC owner of the business, you work for a separate C Corp mgmt. company? 15% on my share of net income in the LLC, even if not making distributions (i.e. putting that NI on the BS for growth / add-ons) is pretty material.
Of course the general transaction could be structured as a C Corp (I've read those threads), but my acquisition is not QSBS eligible so that route loses a lot of its appeal.
Thanks!
Self-Employment Tax as Member of LLC?
by a searcher from Stanford University - Graduate School of Business
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You could also structure as an LP to be more certain. For the active investors (such as the sponsors and managers), they could invest through an S corp to take advantage of the reasonable comp exception, but still get pass-through treatment.