Assume there is a group practice with multiple owners that make more than 250,000 net (let’s say 500,000 average for argument sake, but they truly are not equal, one might be 375,000, one might be 600,000, etc).
They currently operate under an LLC as the practice operating entity.
They are thinking of electing S-Corp status through their LLC to avoid some of the pending tax increases.
As an S-Corp, how will this effect
1) their ability to unequally distribute compensation
Let’s assume everyone takes a salary of $250k. At the end of the year, it's determined that one should make $375k. One should make $500k and the other $600k. That means that one gets $125k more, another gets $250k more and the last gets $300k more.
The last one gets a W-2 bonus of $175k ($300k-$125k), the second one gets a W-2 bonus of $125k ($250k-$125k) and the first one gets NO W-2 bonus. That leaves $375k of S-Corp profit split evenly at $125k each so everyone got what they were entitled.
The trick is this will have to be estimated in December then reconciled to actual for the year when all the numbers are final for tax return purposes. These reconciliation differences will also run through wages.
2) the ability for a partial sale of personal goodwill should a transition occur
Bingo. This is where the S-Corp complicates transitions and you might want to weigh this issue with existing income tax issues.
In my opinion the parent LLC taxed as a partnership provides the most flexibility when it comes to future transitions in and\or out.
There are a couple of potential options, each with pros\cons:
I haven't thought this completely through; however, that MIGHT allow you to minimize your current taxes while maintaining the ease of future transitions.
This model is used quite frequently with certain corporate buyers. They own the "parent" company while the doctors have their own clinical corps. The parent company pays the doctors clinical corporation for services.