In case you weren't on our School of Tax Strategy call last night, here is the answer I gave to Roy's question below.

Q: We are in the process of setting up our entities. We are setting up 3 LLC's. One will be taxed as an S corp and the others to be determined. My wife is the sole managing member of all three LLC's. Would it be smarter to have an LLC be the managing member rather than my wife? What would the tax consequences be either way?

A: First of all, good for you for setting up your LLC's even when you are not sure how they should be taxed. You can always make that change later. As for the manager, this is quite a good question. It really depends on whether the manager will be taking a fee from the entity. Since you presumeably are the sole owners of the LLC, so long as you don't have a charging order against you, it really shouldn't matter. There's no real reason for you to take a management fee.

Suppose, however, that you are sued and a charging order against one or all of the LLC's ensues. In that case, you may want a way to get money out of the LLC other than through a distribution. The likely candidate is a management fee to the manager (especially if you are accruing it as you go so it builds up over time). When that management fee is paid, if it's to your wife, then she will treat it as self-employment income and pay SE tax on the full amount. In addition, she may have a garnishment against her income as a result of the same lawsuit that resulted in the charging order.

An alternative would be to have an LLC taxed as a corporation ("C" or "S" depending on your tax strategy) as the manager. The result of this should be to avoid the garnishment and the self-employment taxes.

The downside to this strategy is additional complication whenever the manager has to sign anything on behalf of the LLC. The signatures get a little combersome. You could have both your wife and an LLC as managers and have your wife as manager sign documents.

You can see that frequently there is a choice between tax savings and simplicity. Most people will opt for the simplicity since the likelihood of the charging order is pretty slim for most situations.

This is why a personalized tax strategy is so important. You have to look at your preferences, your business, your investments, even your age, your family situation and your health. For more information about tax strategies, visit our free website at http://www.ProVisionWealth.com or call us at 866.467.5809.

Remember that tax strategies and asset protection strategies are all about freedom. And isn't that what we are celebrating this weekend? Are you free from worries about lawsuits? Are you free from overtaxation? If not, join our movement for tax and financial freedom. Because when you learn the rules, your financial freedom is closer than you think.

Warmest regards,

Tom