Can an LLC member receive a salary for services that is not treated as a distribution of profits?

Summary answer—Yes:  an LLC may account for regular payments to a member for services and paid ahead of payments to members as distributions of profits as guaranteed payments, essentially a salary substitute.  And like a salary, guaranteed payments are deductible by the LLC as business expenses, and represent regular income to the member recipient. We have been asked on several occasions by businesses organizing as an LLC some variation of the following question: If one or more of the members is paid a sal..

Why does the “active” status of a California corporation get suspended, and how is this avoided?

The right to conduct business as a corporation in California is considered a privilege which can be forfeited or suspended. When the State of California suspends a California corporation’s “active” status it is more often than not because either:The corporation failed to file its Annual Information Statement with the California Secretary of State; and/orThe corporation failed to pay its $800 annual minimum franchise tax to the California Franchise Tax Board.Once suspended, a California corporation is adve..

What is an Earn-out?

In connection with the purchase and sale of a business, including a merger transaction or sale of substantially all of a business’ assets (a merger and acquisition or “M & A” transaction) an earn-out is a mechanism to delay and make contingent payment of a portion of the purchase price. It is a drafting device used to bridge the gap between what a seller (target company) believes it should receive and what the buyer is willing to pay. The earn-out portion of the purchase price is calculated and becomes pay..

Shielding shareholders from liability for corporate acts and omissions

So you incorporated, and now the shareholders are protected from individual liability for acts of the corporation, right? Not exactly. Filing articles of organization in California or a certificate of organization in Delaware is a necessary first step, but it is just that: the first step in protecting founders and other shareholders. To achieve limited personal liability for acts and omissions of the corporation, founders, acting as the newly organized corporation’s board of directors, should also: adequat..

Term sheet for a convertible debt financing

A convertible debt financing, like a preferred stock financing, is usually negotiated at first as a non-binding term sheet, rather than a full set of financing documents. The advantage of this is that it allows parties to wait and only invest in the higher cost of negotiating and preparing a full set of investment documents when the business principals have achieved consensus regarding the convertible debt offering’s material terms. Conducting the negotiation at a high or summary level in a term sheet (relative to..

The “defacto” dissolution of a California LLC; it can result in member personal liability for a judgment against the dissolved LLC

California law provides generally that members of a limited liability company (LLC) are not personally liable for LLC “debts, obligations, or other liabilities.”   There are, of course, exceptions. These include: a member’s liability under the equitable alter ego doctrine; a member’s co-signing for a LLC debt or guarantying a LLC’s performance under a contract; a member’s liability for his or her own wrongful acts – regardless of whether the member was acting as an agent for the LLC or not..