[slubu]

Alright, I have a unique situation come up that I need to figure out and it is a bit outside my expertise. Given the diverse background here I'm hoping some of you may either have experience with this and/or have some ideas.

In this hypothetical, let's say one person is going to take over a business with zero start up costs and become the owner ("Owner"). This business is however dependent on two other individuals for viability, almost entirely ("Partners"). Now assume Owner has agreed to take 20% of net profits, and Partners are to get 80% of net profits. However, there is a huge limitation - the Partners cannot be owners of the business, nor be given money directly from the profits of the business. Assume for legitimate reasons. But as I said before the business cannot be profitable without the Partners' efforts.

Further assumptions:
- Trust is not in question here. All individuals have full trust in each other.
- All tax issues will be taken care of. Meaning the income tax will be paid and then the redistributions made.

So the question becomes, how can the Owner legitimately filter those 80% of profits to the Partners? The main goal here is to create a disconnect between the business and the Partners in terms of the profits. Some ideas I've had and some of their limitations I will lay out:

1. Partners give Owner a large loan with high interest/penalties, and Owner repays the profits through the loan. PROBLEM - you will have to show the initial transfer of money so this may not work, and you will have to show Owner using that money to buy the business.

2. Partners are consultants to the business and get a high salary. PROBLEM - odd to have two partners, the business really does not depend on their expertise in this field, but rather their contacts. Would look shady. Limitation on how much can pay in consultant fees in case profits skyrocketed.

3. Owner takes all profits, pays all taxes. Net goes into personal account. Partners form an LLC for purposes of investment in property. Owner then lends the equivalent due to Partners as loan to LLC for investment, and then forgives the loan later on. So far, my best plan.

4. Owner takes all profits, pays all taxes. Net goes into personal account. Partners and Owner form an LLC to purchase property for investment. In LLC agreement, Owner contributes money, Partners do all the work. Owner contributes the equivalent due to Partners to the LLC, property is bought, later sold and Partners take the money as compensation for their "work."

5. Owner takes all profits, pays all taxes. Net goes into personal account. Owner then gives major gifts to Partners. Cars, trust accounts for kids, payment of college tuition, etc.

So far all I have thought of. Anyone have any experience or suggestions on this? All thoughts are welcome...

*Please note this is just a hypothetical and no laws are being broken or contemplated to be broken.

[ocean]

Can their 80% not be held by an offshore company with a nominee director (so they're not listed as that companies owner) ?

[DVY]

What about having "silent partners". i have some family friends that are silent partners in a bunch of restaurant, spa, medical group type business-es.

The issue with profits going to you is that your tax will skyrocket.

Issue with the loan scenario is that it is basically fraud. Forgiving debt incurs a tax in the USA. The person who has a forgiven loan needs to pay tax on the forgiven loan balance.

Not 100% sure, but some states only record LLC managers/director names, but shareholders aren't recorded on state records. Worth looking into.

[samsamsam]

(11-07-2013 12:18 PM)slubu Wrote:  

2. Partners are consultants to the business and get a high salary. PROBLEM - odd to have two partners, the business really does not depend on their expertise in this field, but rather their contacts. Would look shady. Limitation on how much can pay in consultant fees in case profits skyrocketed.

There is nothing wrong with paying them large consulting fees. The problem is that you will have to 1099 or document payment to them and they will have to pay taxes.

If you go the route of taking all the profits and then dumping it into a personal account you might just make withdrawals in cash (various amounts). Just depends how much profit you are talking about. But giving people cash is non-trackable to a certain degree.

You could also funnel the legit profits to maybe their significant other or family member who they trust. Maybe they are actual owners of the company or the secondary companies you mentioned above.

In example 4. Above - rather than waiting until you sell to take profits - they could get management fees for managing the property.

If you go route 5. you could be fine as long as you stay below the gift threshold. But once again if you go all cash then it disappears anyway. You just need to start living on a cash basis to be able to explain if anyone asks.

Form a secondary company, maybe a corporation, you are the sole shareholder. Or create a couple. Pay from your main business consulting fees to your corporations (which may also be tax advantageous - since on a federal level you ony pay 15% on the first 50k earned by a corporation - compared to your marginal tax rate which is higher as an indivual (I am making an assumption you are earning closer to 6 figures). But put aside the tax advantage. Now you have another layer between the initial business and your partners. They are consultants to your corporations not to your base business.

I know we probably shouldn't ask too many questions, but it seems more along the lines of a non-compete situation. Maybe. So this way, through a second layer (corporation) they are not competing - sort of. Then you could pay them directly and they could just pay their own taxes possibly and you don't have to do all this math. - That was sort of not a fully formed thought. Just an idea.

Also, as you already know, where you form your entities can help shield names.

Just some thoughts.

[defguy]

Anonymous New Mexico LLC with a Consulting contract? An Anonymous New Mexico LLC has anonymity protections so the owners names are not shown in any public documents. Great for identity protections. You will literally need a judge warrant to see who the owners of said LLC are...

There are pitfalls such as it can lose its anonymity any time an amendment is made to the company such as a change of address, etc. But those are easy to avoid if you arent a moron.

So - create an anonymous new mexico LLC with said 2 partners as the owners, and owner of primary business contracts "consulting" to the anonymous LLC. You can even go as far as having Anonymous LLC being owned by another LLC or corporation to make taxes/income distribution easier for the 2 partners. Just talk to an accountant for that info.

[MikeCF]

[Nah, on second thought not a good idea. Would require too many cash withdrawals.]

[MikeCF]

(11-07-2013 12:54 PM)samsamsam Wrote:  

If you go the route of taking all the profits and then dumping it into a personal account you might just make withdrawals in cash (various amounts). Just depends how much profit you are talking about. But giving people cash is non-trackable to a certain degree.

If you make too many cash transactions (especially cash transactions over $10,000), then your account will get flagged and you may get some attention from law enforcement.

Elliott Spitzer never got caught buying hookers. He got caught because he withdrew too much cash from his accounts.

Then they started investigating him.

http://www.nydailynews.com/news/spitzer-...e-1.288370

[samsamsam]

(11-07-2013 02:23 PM)MikeCF Wrote:  

(11-07-2013 12:54 PM)samsamsam Wrote:  

If you go the route of taking all the profits and then dumping it into a personal account you might just make withdrawals in cash (various amounts). Just depends how much profit you are talking about. But giving people cash is non-trackable to a certain degree.

If you make too many cash transactions (especially cash transactions over $10,000), then your account will get flagged and you may get some attention from law enforcement.

Elliott Spitzer never got caught buying hookers. He got caught because he withdrew too much cash from his accounts.

Then they started investigating him.

http://www.nydailynews.com/news/spitzer-...e-1.288370

I think it would just depend how much cash he was talking about generating. I remember on a 60 minute episode, I think that they even have a term for withdrawing amounts right under the 10k mark. And the 10k is a guide, I guess a teller can report just if it seems unusual even if the amounts are less than 10k.

[outhustleu]

I'm a little confused by your situation, mainly what your trying to accomplish or why you don't want the one partner to be on paper or take profits.

I have a somewhat similar situation with my business. Due to a non compete with my day job company I have a business with a partner and everything is in his name, he pays me as a 1099 employee so I sorta get screwed a bit on taxes as opposed to if I was on paper. Me getting money isn't a problem thogh the problem is I don't want to show up on the articles of incorporation and other business paperwork.

If at all possible get your name on stuff. We recently were going to sell our business and I was going to wind up paying upwards of $80,000 in taxes where as my partner was going to pay about a quarter of that because the business was in his name but not in mine.

[Dr. Howard]

Not inventing any other variables and going off of what you've said, go with #5. You are going to have to change the %20 and %80 ratios to account for the tax you're going to have to pay on the %100 profits coming into your personal account though. Maybe change it to an 80/20 share of profits after you've paid your personal tax on it.

[MikeCF]

(11-07-2013 02:32 PM)samsamsam Wrote:  

I think it would just depend how much cash he was talking about generating. I remember on a 60 minute episode, I think that they even have a term for withdrawing amounts right under the 10k mark. And the 10k is a guide, I guess a teller can report just if it seems unusual even if the amounts are less than 10k.

It's called smurfing.

http://en.wikipedia.org/wiki/Structuring

There are computer algos that detect suspicious transactions.

The Feds are watching every move.

[samsamsam]

Thanks MikeCF - that is fucking hilarious - smurfing - how could I forget something so funny!

[Hotwheels]

Gift's have a limit of $13K per year. Above that it is taxed.

Not real sure how they can enforce that unless you do it in large sums.

I've been doing some research on prizes and gifts as a giveaway for a website to drive traffic and it's kinda a pain in the ass.

[scandibro]

The answer would depend heavily on which country you live in, since you didn't mention, I assume the US.

Because of the US regulations and tenacity in pursuing offshore funds, I would not recommend going that route, otherwise you could just make two offshore companies and let them keep the profits until a time when the two de facto owners could get their money.

When it is US, I am not sure, but I would think the consultant route would be the most viable.

[worldwidetraveler]

Are these partners US citizens or residents? If not, you could set up an offshore company and pay directly from the company to the offshore. Set it up as some kind of service and you can deduct it as an expense.

It's kind of difficult to help brainstorm since there isn't a lot of information. All we know is they can't be paid directly from the company which is pretty strange.

[slubu]

I'll try to expand a bit on some of the questions:

1. Let's assume about 500k in profit per year that has to be redistributed. So cash gifts would be out quickly. But I don't know if Owner can gift cars, college tuition, etc.

2. Everyone is US based.

3. I don't care how much taxes are generated, obviously the less the better, but as long as there is a solution even if it involves taxes they will be paid. The IRS is not the issue here. They just can't be involved in the business.

4. Samsamsam I like the idea of the multiple corporations. The problem is not shielding the names from the general public (i.e. a noncompete). It would be an entity with more digging power, a la the government. So if they are hidden that doesn't help, it has to not exist as a direct connection.

5. Because of 1 and 3, consultant probably makes less sense. Why would I need multiple consultants that I'm paying 100k a year to. Also the more removed they are the better from the business.

Hope that helps a bit. I know this is random and not a lot of info so very appreciative of all the brainstorming here. Meeting with an accountant this weekend too.

[Hotwheels]

As far as gifts go it's by dollar value, not only a 13k cash limit.

You can't just gift someone a $100k car with no tax penalty. As I understand it the person giving the gift can pay the tax, but in this instance it would be on $87k.

I've been doing some looking around as I'd like to give away a car as a prize to drive traffic but haven't had a lot of luck finding info. The above is something I came across during this search. It was in an article concerning tax liabilities to the people Oprah gave cars away too on her show.

Probably not much help but it might help your search for what you need.

[samsamsam]

slubu,

In some of the businesses I deal with we have multiple consultants. Since I don't know the true nature (and I respect your privacy) it is hard to understand why you can't have multiple consultants.

As far as gifting goes, I believe the lifetime limit is up to $5M (maybe a tad more now). This is exclusive of the 13k limit. So if you gifted 100K to one individual, 13k would be excluded from your lifetime gifting allowance (the limit which could be changed at any time by our batshit crazy government), the 87K would go against your lifetime limit - you do have to file paperwork to record this. Or as hotwheels mentioned they could get taxed on the 87K.

Could you go irrevocable trust? The beneficiary could be you. Whatever cash you put into it doesn't affect your lifetime gifting, yet it is sort of considered a separate entity with its own tax returns.

I have looked into this a little bit. My lawyers have told me that you have an irrevocable trust setting you as the beneficiary. You establish some LLCs that are owned by the irrevocable trust. Your partners manage your LLCs or are trustees of your trust. They collect fees for managing your assets in this irrevocable trust.

As you make money you pour the cash into the LLCs. Only issue is just the large fees being drawn. But they are drawing fees for doing work for you on a personal level not being paid by your base business.

On a separate level - if they want distance, I have to imagine you need layers. And you need others not just these partners taking some of the money to spread it around. Or you go as others have suggested and just send money offshore. But you need to tell the government you have it offshore if it is over 10K I believe. Once offshore, you pay your consultants to their offshore companies.

Edit: One more option is to look for businesses where it is not unusual for an operator to earn an interest while someone else if putting up the cash. Oil and Gas comes to mind where it is not uncommon for the dealmaker to get carried working interest, where the investor pays for everything and the operator/dealmaker gets a slice of production. Bit even then you don't see 80% going to the operator.

Interesting issue to deal with - but happy for you that you are about to stack some serious cash!