I get this question more times than you may think. Before I give you some pointers, please understand that I am NOT a tax attorney and that everyone’s circumstances are different. The correct answer could also depend on what state you’re in, your specific factual circumstances and even what industry you’re in and what you do.
Therefore, please consult with a local CPA or Accountant related to this, to double-check what I am suggesting and make sure it fits with your unique and specific circumstances.
With that said, what I’m about to address is the following situation (this is for all states, EXCEPT California):
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You –> (own) A parent holding company (typically an Anonymous LLC)
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–> (which owns) A child operating company (typically a local LLC formed in your state of residence)
The question is, how do you move money between you and the child operating company?
The answer depends on whether you need to put money in or take money out.
How to Put Money In a Child Operating Company
Does the child operating company need a …
- Loan? Then you can loan money directly, but put some sort of reasonable promissory note together. You’re acting as a finance company to the child operating company almost like a bank. You can do this directly.
- Capital contribution? This is different. You personally don’t own the child operating company. Only owners can do this, so you would either loan (or make a capital contribution) to the parent holding company, which would in turn, use that money to make a capital contribution itself to the child operating company.
Same issues taking money out of the child. You have a number of options are available, depending on the circumstances:
- Pay you 1099 income. It can pay you, or anyone, for 1099-based contracting services. Please double-check with your CPA / Accountant, because there are rules around 1099 versus W2 payments.
- Pay you W2 income. Same as above.
- Pay distributions. Distributions can only be paid to owners, and you’re not an owner. The parent holding company is. Therefore, the child operating company can pay the parent holding company a distribution, then you have the same analysis for the parent holding company in how to get money out of it.
Again, please consult with a CPA or accountant to determine what is the best method, given your unique circumstances.
What About California?
California is different, because CA can require registration of the parent holding company in many circumstances (see Doing Business in California), and when that happens, the anonymity of the parent LLC can become destroyed.
Therefore, we recommend a different structure for California:
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You –> (own) A parent MANAGEMENT company (typically an Anonymous LLC)
You –> (own) A child operating company (A regular LLC formed in CA), which is MANAGED by the parent management company
In this scenario, the Anonymous LLC is a management company, not a holding company. As a management company, NO REVENUE passes through the Anonymous LLC at all. This means no taxes, profits or losses to worry about. All such concerns happen at the child level.
The tips above then change, and everything revolves around the child LLC. You put money into the company either through a loan or a capital contribution directly. YOU OWN THE CHILD.
You take money out either as 1099 income, W2 income or as a distribution directly to you. Again, because you own the child.
6 Comments
Hi Larry, great article!
For California Regarding “You take money out either as 1099 income, W2 income or as a distribution directly to you. Again, because you own the child.”
How would I take money out as a distribution directly to me?
Hi, Stacey.
We need to update this article, because it’s not exact for CA folks. In CA, you will own the CA LLC directly, so therefore you will take the money out of the CA LLC directly (using one or more of the same methods we say in this article for the parent). In CA, the parent doesn’t own the child, it only manages the child, so no money would be moving from the child to the parent.
Larry.
Hi Larry – We set up the following structure:
Anonymous LLC in WY that manager-manages Operating LLC in CA (WY LLC is the member for Operating LLC in CA)
1) With this set-up can we take money in/out directly from CA LLC?
2) Was it correct to list the WY LLC as the member for CA LLC or do we need to change the member to the actual individuals?
Hi, Jenny.
Please see my other reply to your question, which should answer these questions.
Good luck to you. Larry.
Hi Larry! Love the article and have a quick question
Are we able to move money in/out of this LLC directly? Do we need to change the member to actual individuals in the case below?
WY Anonymous LLC manager-manages a CA Operating LLC. The WY LLC is the member of the CA Operating LLC (although not listed on state website)
Hi, Jenny.
We do not recommend the structure you have. Specifically, the WY LLC should NOT own the CA LLC. Instead, it should just be the manager. The reason is because of the “long-arm statute” in California. Review the rules as identified by the CA Franchise Tax Board.
If you review those rules, you will see there are a number of thresholds that are rather easy to meet, and specifically, could trigger as against your WY LLC. If they do, then your WY LLC will be required to register (i.e. Foreign file) in the State of California, which would destroy any anonymity you’re trying to achieve.
Therefore, it’s much better to NOT have the WY LLC own the CA LLC directly. Instead, you own the CA LLC directly (and anonymity is still maintained, because you report manager information, not member information). Then, this will sort of provide an answer to your question, I think.
If you want to talk to someone about it, I would recommend a 30-minute business attorney consult.
Good luck to you. Larry.