Tax Structure for Your Sponsor Company: S Corp, Partnership, Fees and Promote
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Sponsors earn in different ways, and each can be taxed differently. Choosing how your sponsor company is organized and taxed affects what you keep. This post explains the main issues and the questions to take to a CPA. It is not tax advice, since the right answer depends on your state, your income and your deals.
What are the common structures?
| Structure | In short | Things to ask |
|---|---|---|
| Single-member LLC (disregarded) | Income goes straight to your personal return | Self-employment tax on active income; liability still separated |
| Multi-member LLC (partnership) | Partners share income by agreement | Allocations, guaranteed payments, self-employment tax rules |
| LLC or corporation electing S status | Owners pay themselves a salary and take other profit as distributions | Reasonable compensation, payroll, state treatment (IRS) |
| Management company plus deal-level entities | Fees flow to the management company | Who owns what, and how partners are paid. See two-tier structure |
An LLC is a state-law entity, and the IRS lets it choose its tax treatment (IRS, LLC).
How is each kind of income treated?
- Fees for services: typically ordinary income. Whether self-employment tax applies depends on structure and role. Ask your CPA how fees paid to a company reach your return.
- Promote: a profits interest in the deal. Long-term capital gain treatment can depend on a holding-period rule for carried interests (26 U.S.C. 1061). See carried interest and Section 1061.
- Return on your co-investment: taxed like any investor's, through the K-1.
- Deductions: sponsor expenses, home office, travel and software may be deductible against business income.
- QBI: some sponsor income may qualify for the qualified business income deduction. See QBI deduction.
What about an S corporation?
Some sponsors use an S corporation for the management company so part of the income is salary and part is distributions, which may reduce self-employment tax. The trade-offs are payroll and filings, the need to pay a reasonable salary, limits on who can own shares and how it interacts with partners and the promote. Do not assume it fits. Ask a CPA to model it with your numbers.
What should you bring to the CPA meeting?
- A list of expected income: fees, promote, co-investment.
- The ownership split among partners and how each is paid.
- Your state and the property states. See Texas franchise tax and California fees as examples of state costs.
- Your other income and whether you are leaving a job.
- A draft of the deal's fee schedule.
See also CPA guide to syndication tax work.
Our take
The best structure is the one you can run cleanly. Decide with a CPA early, write it into the partner agreement and keep the books so each stream of income is clear.
Trade-offs and who this is not for
- Not tax advice. Only your CPA can recommend a structure.
- Common mistake: electing S status without paying a reasonable salary.
- Not for sponsors who have not yet defined their fees.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from friends and followers who already trust them, under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services. We are not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire their money to escrow at Enterprise Bank & Trust, in the deal's name.
DoorRaise keeps the deal in its own company with its own documents and a deal page, and runs an accreditation check on every investor, in 506(b) and 506(c) raises. Flat fees, never a percentage of the raise (see pricing). Create your free sponsor page.
FAQ
Should my sponsor company be an S corporation?
It depends on your income, state, partners and plans. Ask a CPA to model it before you decide.
Is sponsor fee income subject to self-employment tax?
Often, depending on the structure and your role. Your CPA should confirm for your facts.
Is the promote taxed as capital gains?
It can be, subject to rules including a holding-period test. Ask your CPA.
When should I decide on the structure?
Before the first fee is paid or the deal closes.
Sources
- IRS, S corporations
- IRS, Limited Liability Company (LLC)
- IRS, Partnerships
- 26 U.S.C. 1061, carried interests
This article is general information, not legal, tax or investment advice. Talk to a CPA and a securities attorney about your sponsor company. DoorRaise is not a law firm, accounting firm, broker-dealer, investment adviser or funding portal.