MediaTech Law

“Guaranteed Payments”: What are They?

Guaranteed payments are exactly that: They are payments that are “guaranteed”.  By whom?  Well, salary payments are technically “guaranteed” in the sense that there is a contractual obligation to pay a certain amount on a regular basis.  But in the partnership context, including LLCs treated as partnerships for tax purposes, guaranteed payments are made to partners or other owners (“members” in the case of an LLC).

Guaranteed Payments: What Significance?

Partners form a partnership, go about building a product or service, and prepare to (hopefully) make money.  (See Warren Buffett’s Rule No. 1 of business: “Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”)  To get there requires significant investment in time, goods, services and money.  Along the way, people actually have to pay rent, buy health insurance, pay for gas and the electric bill, and occasionally eat.  Maybe take a day off once in a while.

For partnerships and LLCs, guaranteed payments even-out the unpredictability of earning money from a small business.  Put another way, guaranteed payments are profits of the business paid during the course of the business year rather than all at once at the end of the year.  To be clear, though, guaranteed payments are not necessarily dependent on profits, and can be paid out the same as other business expenses to reduce profits, subject to certain IRS rules (discussed below).  Rather, guaranteed payments may be determined based on forecasted profits, but are not dependent on profits: