Forming a subordinate LLC within a Partnership

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13-May-2014 6:13pm
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Salt Lake City, Utah
First post here, so bear with me.

My little practice has its first accounting client, and before I finished getting them set up in an accounting software, I have encountered my first issue that I am seeking some clarification on.

The business is currently constituted as a two person partnership LLC. They buy and resale large items, maintain minimum inventory (items are often purchased and sold within 30 days) and have no other employees working in the business. One partner handles the operations (COO type), while the other acts as CEO and seeks out business opportunities.

Over the course of the first year of operation, the CEO has noted that the distribution model of a partnership isn't really working and was asking about maybe setting up a subordinate SMLLC to handle the actual operations of the business. That way, the reselling venture would be separate from the partnership and could allow the partnership to seek other partners or outside investment for ventures outside the current buy/resell business. He would also prefer to pay himself and the other partner with wages instead of distributions from the partnership for various reasons, and hopes to be able to hire additional employees this year if the business continues along its current trajectory.

In my research, I have seen subordinate LLCs mentioned in a real estate context, with individual properties being held as LLCs underneath a parent partnership/S corp. I can picture it conceptually in my head, but the accounting and tax implications are a little unclear. I have advised my client to speak with his legal consultant, but I also want to be able to provide him with sound tax/accounting advice as well.

- Would it be possible to do something similar in this situation? Would this be an appropriate use of a disregarded LLC?

- Could the partners become employees for the subordinate company and still manage the partnership, or does this create a conflict? Subordinate would be 100% owned by the partnership and CEO would ensure that proper management agreements are instituted with respect to managing the disregarded LLC.

Any advice would be greatly appreciated.
 

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