LLC operating as partnership-salary questions

[tbrown]

Hi,
I am a member of a two person (husband/wifes) LLC operating as partnership.
Each partner has 50% stake in the company.
Partner 1 does some consulting work through the LLC (clients pays the LLC based
on hours worked by partner 1). This is basically the revenue coming into the
company.

Partner 2 put some odd hours, every now and then, in to the internal management/
operation of the LLC.

At the end of the year, profits/losses (what is left after taking the expenses out)
would be passed to the partners (members) based on their % stake.
These would be reported on 1065.
The expenses do not include any wages/salary.

Both partners pay estimated taxes etc as required.

This above seem straight forward enough.

Now to some questions:
1. Since partner 1 is working 40+ hours a week for the LLC and bringing in the
revenues, can he get take a monthly distribution as salary for his services ?
and likewise partner 2 get a distribution for her services ?

The partners would then pay estimated taxes based on this payout plus what they
project they will get at he end of the year from profits (or losses)

2.If the answer to 1. above is yes, then does the LLC need to issues an 1099's to
the two partners ? is there anything else one needs to keep in mind ?

3.if the answer to 1 above is NO, then can the amount profit/loss paid out to
each member be based on the services rendered to the LLC and not be based on the
%stake each partner has in the LLC ? (This would all being spelled out in the
operating agreement of course)

I plan to talk to a tax adviser, but need to have some basic understanding
and go prepared to some extent.

thanks in advance.

 

[John]

Hi,
I am a member of a two person (husband/wifes) LLC operating as partnership.
Each partner has 50% stake in the company.
Partner 1 does some consulting work through the LLC (clients pays the LLC based
on hours worked by partner 1). This is basically the revenue coming into the
company.

Partner 2 put some odd hours, every now and then, in to the internal management/
operation of the LLC.

At the end of the year, profits/losses (what is left after taking the expenses out)
would be passed to the partners (members) based on their % stake.
These would be reported on 1065.
The expenses do not include any wages/salary.

Both partners pay estimated taxes etc as required.

This above seem straight forward enough.

Now to some questions:
1. Since partner 1 is working 40+ hours a week for the LLC and bringing in the
revenues, can he get take a monthly distribution as salary for his services ?
and likewise partner 2 get a distribution for her services ?

The partners would then pay estimated taxes based on this payout plus what they
project they will get at he end of the year from profits (or losses)

2.If the answer to 1. above is yes, then does the LLC need to issues an 1099's to
the two partners ? is there anything else one needs to keep in mind ?

3.if the answer to 1 above is NO, then can the amount profit/loss paid out to
each member be based on the services rendered to the LLC and not be based on the
%stake each partner has in the LLC ? (This would all being spelled out in the
operating agreement of course)

I plan to talk to a tax adviser, but need to have some basic understanding
and go prepared to some extent.

thanks in advance.

I believe the answers would be (1) yes and no to the 1099's, but you should
ask in
(and definitely see an accountant !)

 

[Paul A. Thomas]

Now to some questions:
1. Since partner 1 is working 40+ hours a week for the LLC and bringing in the
revenues, can he get take a monthly distribution as salary for his services ?
and likewise partner 2 get a distribution for her services ?

Nope. The partnership can make "Guaranteed Payments to Partners" that are
treated not as wages (and subject to payroll taxes) but as earned income
subject to SE tax by that partner.

The partners would then pay estimated taxes based on this payout plus what they
project they will get at he end of the year from profits (or losses)

2.If the answer to 1. above is yes, then does the LLC need to issues an 1099's to
the two partners ? is there anything else one needs to keep in mind ?

Guaranteed Payments are deducted by the Partnership, but included as income
on the partner's individual K-1.

 

[Paul H. Glotzer, CPA]

Partnerships do not pay "wages" to their partners. They can pay them
what is called a "guaranteed payment" which is deductible by the
partnership in arriving at its net income. The guaranteed payments
are allocated to specific partners on their K-1s from the partnership
and would be included in the income to be reported by the partner on
his/her personal tax return as income from self-employment.

Another possibility is that the partners share in the profits
according to a formula that takes into account what each partner
contributes to the bottom line. An advantage to a partnership is that
profits and losses can be allocated with a formula rather than by the
partners' interest in capital. The requirement for this is that the
partners' capital accounts properly reflect their share of profits or
losses.

What I've told you is very general. Be sure to talk to a tax advisor
in your area.

PHG

 

[Guest]

Paul and Paul,
Yes I did use some loose terminology (wages), thanks for the clarification.
So, just to test my understanding, it sounds like that I could make
regular (say monthly) "guaranteed payments" to each of the partners
based on their time/service to the company and the partners would pay
self employment taxes based on these "earnings". These would be
reflected on their K-1. I suppose one could make additional "guaranteed
payments" for bonuses etc.
At the end of the year, whatever is left in the company account, would
be distributed to the members based on their individual interest in
capital (50% in this case). What is the correct term for this
distribution ? is it simply "profit"? Would this also be captured on
the K-1 ?
where does 1065 fit into the picture ?

thanks again for taking the time to respond.

 

[Paul]

Yes I did use some loose terminology (wages), thanks for the clarification.
So, just to test my understanding, it sounds like that I could make
regular (say monthly) "guaranteed payments" to each of the partners
based on their time/service to the company and the partners would pay
self employment taxes based on these "earnings". These would be
reflected on their K-1. I suppose one could make additional "guaranteed
payments" for bonuses etc.

Yes. "Guaranteed Payments" aren't really "guaranteed", they don't have to
be consistent in dollar amounts, or frequency. They do, however, need to be
adressed in the partnership agreement (in writing) as to the formula for
determining the amount and/or frequency.

At the end of the year, whatever is left in the company account, would
be distributed to the members based on their individual interest in
capital (50% in this case). What is the correct term for this
distribution ? is it simply "profit"?
Yup.


Would this also be captured on the K-1 ?
Yup.

where does 1065 fit into the picture ?

The 1065 is the partnership return that reports the revenues and expenses of
the partnership business activity. Certain items of income (interest) and
expenses (donations, Section 179 deduction) are not income or a deduction of
the partnership as such and are allocated among the partners on the K-1
along with the guaranteed payments they received, and their prorata share of
partnership profits or losses.

If you don't know what you're doing in the preparation of the 1065, then
don't try it on your own.

 

[Guest]

Paul,
Thanks for the advice/info.

I have posted a new set of question related to retirement account
("LLC operating as partnership -SEP questions" thread on this group)

If you would offer similar guidance on that subject, it sure would make
my day.