Can LLC members (owners) set their own wages?

Question

Not too long ago, one of the members of our LLC was let go because of negligence of work. Due to some problems, we are unable to let him go fully. He has been discharged of the daily ongoing business of our organization and is mainly a "silent partner." Our lawyer has advised us to switch from dividend reinbursements to payroll reinbursements and reinvest profits back into the business. This is to prevent the fired owner from getting anything. Is there a limit (or law that states) to how high LLC members can set their own salary (wages)? Is there any backlash to expect from the fired member because of increased wages for the majority owners?

Answer 1

Of course, you can set your own wages because it is your company (private). Whether you take dividend disbursements or use payroll, it all shows up in your individual taxes as a pass through organization. A more relevant question is can you legally, by statute or code or in your operating agreement cut a valid member's share of the profit. Your circumvention could breach a fiduciary duty to a member. And if you can vote to change the payment scheme, then why cant you vote him/her out completely.

Answer 2

If I were the disgruntled partner, I'd be looking for a way to sue for my portion of the profits, so I'd be very careful if I were you. The discharged partner, if a minority owner, is probably at the mercy of the others of you. Something else to consider in your situation are the tax implications. I am presently taxed as an s-corp (the same as the LLC) and distributions are much better than payroll because I don't have to pay the medicare & SS, not to mention state payroll taxes. This is about 15% where I am. I would suggest getting an arbitrator or mediator and resolve the issue so you can once again take distributions instead of payroll. If not, sue to expell him or reorganize without him and transfer your assets. This may be tricky legally and have some significant tax consequence. Again, talk to your attorney AND CPA, or find a JD-CPA.

Answer 3

Under an LLC you can determine which members get profit distributions so essentially your attorney is probably advising you that you should forgo all distributions for now. Then for the members that are FT employees, they should be drawing salaries not distributions so that your "silent partner" has no case for not getting any distributions going forward. It puts everyone on a level playing field that you either have to be an employee or not one, silent partners don't get draws.

Answer 4

There is always backlash to a fired officer. I hope that your business is all above board, all records in perfect shape, any and all taxes current...or there will be hell to pay. Your lawyer has the right idea...payroll and percent of profits. Good luck

Answer 5

That's a question you really need to ask your lawyer! In most states there is some type of legislation that applies, but it is vague (and purposely so).