HASLOO GROUP PRODUCTION STUDIO@SHUTTERSTOCK.COM
LLCs Taxed as S Corporations
Drilling Down Into the Tax Code Reveals Pitfalls
BY MARK E. LASEE
hile visiting your dentist for your semiannual checkup, Dr.
Gnash mentions that he wants to market
a new product that provides him an alternative revenue source, because his dental
practice has been somewhat slow over the
last couple of years. Dr. Gnash excitedly
describes his patent for a cell phone trans-mitter/receiver that can be implanted in a
patient’s molar. He says that it “gives a
whole new meaning to hands-free communication.” He mentions that one of his
other patients, Mr. Dinero, has agreed to
back him. You deal with business startups all
the time and suggest they make an appointment to see you.
A few days later,
Dr. Gnash and Mr.
Dinero meet with you
to discuss forming a
They relate that they
have already come to
MARK E. LASEE is a partner in the Scottsdale office of Kutak Rock LLP.
He is an AV Preeminent-rated lawyer and a real estate specialist certified
by the State Bar of Arizona. His practice focuses on significant commercial real estate and business transactions.
Thanks to Nicole E. Forsythe, a tax associate in Kutak Rock’s Kansas
City office, for her invaluable input.
an understanding as to business terms:
Mr. Dinero will contribute $100,000 as
seed money; Dr. Gnash will contribute a
non-transferable non-exclusive royalty-free
license on the patent and know-how to promote the product.
1 They have agreed to a
distribution waterfall that would: ( 1) reimburse federal and state income taxes owed
by them from the taxable income of the
company; ( 2) from company proceeds, pay
Mr. Dinero eight percent on his original
unpaid capital contribution for taking on
the risk and replacing the earnings he would
otherwise receive had the funds been invest-ed elsewhere; ( 3) from company accounts,
Mr. Dinero would have his initial invest-