LLC operating as partnership-salary questions


T

tbrown

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.
 
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S

Scott Stevenson

tbrown said:
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.
Answers to questions 1 (a & b). Yes. The payments for
services are called guaranteed payments. They must be to
partners, with regard to services provided to the
partnership and must not be determined with regard to the
partnership income. These payments are generally deductible
by the partnership (and appear to be so from your fact
situation) and reported separately on the individual K-1
received by each partner. So, net income would be reduced
by the sum of the guaranteed payments and the result would
be allocated to the partners by their respective profit and
loss percentages. Then each partner's K-1 would also report
their respective guaranteed payments. And yes each partner
would base their estimated taxes on the total of their
individual guaranteed payments plus their allocated share of
net partnership income. Of course, in your facts you state
that the individual partners are husband and wife. If they
file a joint return the calculation of estimated taxes
separately is a moot point.

2. No and yes. The operating agreement of the LLC had
better lay out how the guaranteed payments are based and
paid. The usual "boilerplate" agreement is mostly silent on
this issue so the agreement would have to be amended. What
other issues such a change might bring about should be
checked with the state that the LLC is registered in. Or
seek counsel - which you probably will have to do anyway to
properly amend the operating agreement.

3. Not applicable.

And yes, do seek tax advise on this matter. While what I
have shared with you is based upon federal tax law each
state handles LLCs differently. There may be some
differences in your state that should be considered before
proceeding.

Scott W Stevenson, CPA in CA
(e-mail address removed)
 

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