How do I set up an LLC that pays royalties to me and my business associates?

UPDATED: May 12, 2011

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How do I set up an LLC that pays royalties to me and my business associates?

I want to set up an LLC with a partner. We lease and sell access to on-line education courses. We are paid by educational distribution companies. We pay ourselves and other independent contractors a royalty for creating the class based on the number of students enrolled. We would like to make sure our pay is considered royalty pay to avoid self-employment tax. Can an LLC do this and how can it do this?

Asked on May 12, 2011 under Business Law, Utah


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

Yes, an LLC can do this. Probably the best way is simply have the LLC itself be paid by the educational distribution companies and then simply, as owners, take money out of the LLC in the form of distributions. You can--and should--in the LLC's operating agreement(s), specify how much (either in dollars or as a % of money in the LLC) each owner can take out; when the money can be taken out; the mechanism, including notice to each other (to avoid any temptation to take money out on the sly); and if there are any minimum financial threshholds tha have to be met (e.g. the LLC must always have more than $10k in its account, to cover any contingenices). You might also take the money out by having the LLC pay certain expenses for the two of you: e.g. provide and pay for health insurance; pay for  car leases; pay for internet and telecom; etc.--i.e. business related expenses can be borne directly by the LLC.

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