All Forum Posts by: Billie Joe

Thanks for adding to the answer @Ronald Isgate! To follow up. Are you saying that ownership interest would have to change in order to contract 1 partner to provide services? I suppose that would makes sense.

Basically, if the partnership is currently 50/50, and one is contracted for services, it would have to change to something like:

Partner 1: 90% interest

Partner 2: 10% interest , and then 40% of "profit" would be what's paid out for contracted services (though it wouldn't be considered "profit" since it's written off on taxes and Partner 2 would claim the 1099 on personal taxes as independent contractor).

Or another example:

Partner 1: 70% interest

Partner 2: 30% interest, then 20% of "profit" is paid out for contractor services. (Again, not profit since it would be written off).

I could be completely wrong, but that's what I understood your answer to be saying.

Thank you so much for responding! This is very helpful! Thank you!

In an LLC taxed as partnership, can 1 of the partners be an independent 1099 contractor to provide services for the business?

For example:

Partner #1 Limited Partner (K-1)

Partner #2 Limited Partner (K-1) AND 1099 Contractor - Basically receiving payments as a contractor for running the majority of the business, and as a limited partner (which would account for any money beyond the 1099 payments) 

Or does this have to be structured differently for tax purposes? 

Thank you in advance to anyone who is so kind as to share their time and wealth of knowledge with me! 

Thank you so very much for taking the time to respond, and for being so detailed! This is incredibly helpful! I have been trying to find this answer for so long, including making many calls to the IRS, and never getting to speak to anyone, waiting on hold for hours only for the call to drop. lol. 

I apologize for my lack of clarity. We have both an LLC registered with the state and a partnership for the business, and the LLC is taxed as partnership. One member is a general partner and the other member is a limited partner. So that would make our LLC member managed.

So to confirm, what you're saying is that the member manager's K-1 should say "General Partner or LLC manager". And the other partner, who does not participate in the business operations should say " Limited Partner or other LLC member". But even if that info is marked wrong on the K-1, the IRS is not that concerned about it-- They just want the numbers to be right. Is this what you're saying?

• It is my understanding, that when you have an LLC limited partnership, at least one of the partners are General. We have 2 partners, and the type of business is rental.
  
  One partner is Limited and the other is General- who materially participates in the business.
  
  However, our CPA checked the box that says "Limited partner or other LLC member" on the K-1 form for BOTH partners.
  
  Will that pose a problem when we go to file on personal taxes? Or does it even matter?
  
  The options on the K-1 are:
  *General partner or LLC member-manager
  *Limited partner or other LLC member
  *Domestic partner
  *Foreign partner
  
  Should partner #1 have "Limited Partner" on their K-1 & Partner #2 have "General Partner" on their K-1?
  
  I would think that having the different statuses would be taxed differently, but I could be wrong...  

Since we're on the topic, I should also ask: If they are taxed differently, what is the difference? 

@Mike S.

Thanks for sharing your insight and your setup! We are in Ohio. We are able to do an anonymous LLC, but not with the same charging order protection as the Wyoming LLC.

You're right about your structure being too much for what we have, but it's definitely something to consider in the future as we grow, so thank you for that! We don't have much, but what we do have is paid for, so we want to protect it the best we can, without going overboard.

I think we're going to just leave it taxed as partnership for now. It would be a Manager managed LLC, with me being the designated manager. - Designating myself as a 1099 contractor for the business. I believe that whether I'm a partner or contractor, I'd be taxed the same.... and yes, I believe you're right about it being tax neutral.

Since you have each property in it's own LLC, do you capitalize each LLC?

I'm also a little confused as to how the 2 LLCs would be connected....So, if you have an LLC that's owned by another LLC (parent umbrella LLC), does that mean you have to register as a foreign entity? or does that mean that you have 2 separate entities, and one just owns the other? or 2 separate entities, and one works for the other? or does that mean, one is made to be a partner or manager inside of the other? It almost seems as if all of these are options, but each would mean something different.

Do you have to register as a foreign entity, to have 1 LLC (from another state) own the LLC in your state? Or can you register them separately and have the details worked out in an operating agreement?

Also, do you have to capitalize the parent LLC?

The answer might seem obvious, but this is my first rodeo. Anyone so kind to answer, would be greatly appreciated :) 

By the way, you're right Mr. McElroy- but you already knew that. lol.  Upon looking further into the scenario, the necessity of payroll, quarterly reporting, and the more expensive and lengthy (1120) return with the S corp is enough to turn me toward just being taxed as a partnership and keeping it simple for now, especially since the business has very little income. I had no idea that all of these additional things would come with being taxes as an Scorp. Most people focus on the advantages for businesses with 30k or more in income-- and that's not us. 

Still the missing piece to the puzzle is finding out why I should or should not own assets in the same LLC as the business.

@Eamonn McElroy Thanks for your reply!

That's good to know about it not being advisable to have assets in an S Corp. I will look into that further. 

Yes, I'm aware that I would be subjecting myself to self-employment tax, which, to my understanding, would be offset by being single, having dependents, and not having a large amount of earned income personally. Once that changes is when we would revisit the operating structure. To keep from having to complicate things by employing myself, I was going go the 1099 route-- Do you see any possible issues with that?

So, are you saying that there may be more tax liability by having an asset and the business together in the S-corp, as opposed to separating the asset and the business in 2 separate LLCs?

I have spoken to some CPAs and attorneys, and they have given me some good advice, but at the same time, seemed a bit unfamiliar with my particular situation (our situation is kind of an anomaly), but based on what we discussed, this appears to be the way to go (for now at least). 

The last missing piece to the puzzle is the difference in tax liabilities between having the asset and business together (in the same LLC) or separate LLCs. 

@Eamonn McElroy

My mother and I purchased a rental property last year, we are 50/50 owners. We paid cash for property at 22k, put some work and money into it, and it's been valued by the auditor at around 45k before improvements (however hasn't been officially appraised). We were looking at a couple of options for the the rental:

A. Put property into LLC 1 and manage the property with LLC 2 in the same state.

B. Put property AND Management in 1 LLC, which would be owned by a Wyoming LLC

Either option would be for protection of assets.

Question:

What are tax implications of putting the property into 1 LLC and Putting the property mgt (financial portion) into another LLC? I'm assuming we wouldn't be able to lower our tax liability by claiming depreciation on the property since the LLCs would be separate, but would we even need to? Could that create a negative impact on the taxes for the 2nd LLC (Property Mgt. side)? Am I missing something?

Put more simply: On the tax side of things, would it be better to put everything into 1 LLC or separate the asset by forming another LLC for the Management Side?

Further Details that may be pertinent: We are planning to file as an S-corp, with me managing the property and her receiving the distribution portion. 

We are both reasonably low income and the business only net profits around 7,500 per year, so since I have dependents to claim, the self-employment tax would not negatively affect me right now, and since my mother is retirement age, that scenario seems like the best option. 

It is also my understanding that any money that goes into an LLC (taxed as S-Corp), would not be taxed until it is paid out to its members (me or mom). Is that correct?

Thank you in advance to anyone who is willing to share your wisdom and experience!