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Written by : Rogelio Gavette |
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are you and your business partner wondering how you should be paying yourself and your multi-member LLC today I'm going to explain to you exactly what you need to do the five steps you need to take to make sure that both you and your business partner can sleep better at night knowing that your LLC is properly taken care of and that you're each being paid adequately based on your work in the business that sound good let's do it are you looking for legal guidance and practical business tips without spending thousands of dollars on high-priced lawyers and law firms hi my name is Jim Hart and the founding attorney here at Hawthorn law we help online businesses and small business owners to protect their business without spending a small fortune in both time and money so that you can focus on what matters most and that's building something that truly matters in the world if you're interested in legally protecting your business and building it the right way then go ahead and click the subscribe button down below and don't forget to hit the little bell thing so that you can notify when we publish new videos each and every week and also especially for this video if you are in business with somebody else which I'm sure you are you wouldn't be watching this video make sure you share this video and my channel with your business partner so that both of you can be on the same page about how it is that you need to run your business legally to make sure things are in order so today I want to talk to those of you that are in business or somebody else about what you need to do to protect yourself and your business when it comes time to pay yourself this is a really hot emotional topic for a lot of businesses when there are multi members of that LLC now if you're not in business with somebody else if you have a single member LLC which means that you're in business by yourself and you want to check out my other video on how to pay yourself in your single member LLC I just updated it for 2019 so link up there now if you are in business for somebody else you know how hard it can be it's basically like marriage without sex unless that is that you're in business with your spouse in which case you're a single member LLC in the eyes of law you may not have known that but you are so espoused to spouses together that's still a single member LLC that's not a partnership I bet you didn't know that did you so for the rest of you who've decided to go into business with somebody that is not your spouse this could be a boyfriend or girl this could be a colleague professionally or personally this could be a friend this could be a family member this could be somebody you met in college or university this video is for you whomever it is that you're in business with you need to make sure that the two of you are on the same page about how you're going to pay yourself with your multi-member LLC this is an incredibly important decision that you need to make you need to be an agreement about how and when each of you are going to get paid and how much you're going to get paid if you can't agree on this it's going to lead to a lot of infighting between you with the business it's going to lead to problems regarding how you're going to be spending the money in the business it's going to lead to a lot of animosity between the two of you and and ultimately it could tear down both your friendship if you were friends before you got into business and it could turn her down the business itself which is a problem and that's something that you want to avoid I'm sure so obviously there's a lot at stake here by the end of today's video I'm going to talk to you about the five things that you need to include in your operating agreement to make sure that all these things don't happen for you and your business but before we get to that quick water break today again I don't have my coffee into water from my mega tub by the way I love these things I don't know if you know but this is like a Yeti knockoff and these things keep your water cold for hours even if it's in a hot car amazing so in many of my videos I talked about the importance of having a solid operating agreement and that is never more important than when we're talking about a situation where you have a multi-member LLC now I say multi-member LLC but this could also be a corporation with multiple shareholders it doesn't necessarily have to be an LLC or it could just be a general partnership where you have any reformed a corporate entity but you have multiple partners in the business basically the idea of the operating agreement here is that you need to agree to all these things before you start operating business it's kind of like again I'm gonna go back to the the analogy of a marriage having a prenuptial agreement before you get into the marriage to make sure the marriage goes south that you know how you're gonna handle things now if you are a single member LLC you don't need to spend a whole lot of time on this because if you ever need to make a change the operating agreement you just make the change it's it's a it's a living breathing document that can change as as times change but if you are a multi-member LLC and you want to make a change to your operating agreement you need to think long and hard about how you're going to do that because there's somebody else on the other side that might have a say in whether or not you want to make a change to that agreement and that's your business partner in the course of a multi-member LLC you can't just change the agreement anytime you want all of you need to agree and that's why it's important to get these things down at the outset so here are some of the main issues that you're going to need to face when negotiating an operating agreement for a multi-member LLC and this is specifically in regards to what you need to do in terms of getting paid there are a bunch of other issues that you're going to need to negotiate but these are the most important issues you're going to need to deal with when you're talking about how you and your business partners are going to get paid ideally you would agree to all these issues before you number one invest money into the business or to start actually operating the business sometimes that's not possible some of you are probably watching this video and you've been operating for years and now you're wondering what you need to do well you need to get operating agreement in place as soon as possible before there are any problems with your business so let's go through these five issues that you need to deal with real quick number one how are you going to get paid are you going to have a set salary or you're gonna get paid based on a percentage of revenue or are you going to get paid when the business is profitable are you gonna get paid based on commissions how are each of you going to get paid that is the number one decision you need to make the second option is pay split how are you going to divide up the pay are you gonna be paid each 50/50 or you each equal gonna be taking equal draws from the business or are you gonna be doing something else third opt
Thanks for your comment Maxwell Matsubara, have a nice day.
- Rogelio Gavette, Staff Member
in this video I'm gonna break down partnership taxation basics and basis which is a common concept for partnerships so I'll be explaining how a partnership is taxed and how to keep partnership accounting records because that's what gives you the information you need for taxes and all of this will lead us right into what the multi-member LLC or partnership business needs to keep track of itself and what individual partner members need to keep track of on their own because the business won't be doing it for them if you've been confused by what you find online I don't blame you there's a lot of technical textbook type examples which tend to be disconnected from reality I'll be showing you my partnership worksheet calculation in Excel which compares the three types of member partner basis calculations which I'll be explaining more momentarily and we'll be looking at my multi-member LLC business spreadsheet template now like many things taxes the partnership taxation is quite complex but I'll be explaining the differences between inside and outside basis capital account tax basis so if you've been hearing these terms when you're trying to figure out your partnership taxation I'll be clarifying the differences in this video now I do have other videos that will go through the individual calculations the differences and paying yourself and you'll find the links to those in the description below however I highly recommend watching this video first my name is Amanda you're watching the business finance coach on YouTube where I simplify business to help small business owners succeed I'm the creator of the small business MBA which is an online program that helps business owners step-by-step to set up their LLC their business accounting taxes and legality all in one online II course I give away a free version of the spreadsheet template that's in that course called the free business spreadsheet template if you need help with accounting quarterly taxes and end-of-year taxes all covered in there so there's links in the description below to everything I just mentioned for now let's get back to partnership taxation first let's just go over who exactly partnership taxation is for we have legal business types of multi-member LLC s meaning there's two or more members and partnership businesses now both of these types of businesses default to be taxed as a partnership now if they qualify they can elect to be taxed as a corporation and then text as an escort and an S Corp combines aspects of the corporation and a partnership and it's really a common tax type so how is a partnership text a partnership is called a flow-through entity because the activity from the business flows through to the partners and so the business itself pays no taxes and this happens on form 1065 which is the businesses tax form the business form reports all of the businesses activity income expenses other income other deductions and that all of these amounts flow through on to schedule K ones and there's a schedule k-1 for each partner attached to the form 1065 so all of the activity is reported to the partners based on their ownership percentage each business has a hundred percent ownership share which it can allocate between its owners so all of the amounts on the schedule K ones need to add up to the amount on the 1065 just like all of the partners ownership percentages need to add up to a hundred percent for the business then each partner reports their schedule k-1 on their personal form 1040 for their taxes that means that the business must file before the partner can file their own personal tax form they report the schedule k-1 just like they would a w-2 or a 1099 however that's where things get more complicated because unlike a 1099 which has one number the schedule k-1 will have often many different numbers because it's related to the business activity when that business activity flows through to the K ones it retains its character that's a tax phrase which means if the income was interest income for the business its interest income for the partner on their personal return if the income was rental income then it's rental income on the partners return so let's flip over to form 1065 and schedule k-1 and I'll show you what this looks like form 1065 u.s. return of partnership income so this page one reports what the business actually does so this is going to be the ordinary business net income or loss the income is reported on top and the expenses reported on the bottom that gets us down to this ordinary income or loss line 22 now you'll notice this income doesn't include things like investments dividends or interest sales of things this is only for what the business is in the business of doing that's why there's costs of goods sold gross profit ordinary income or loss now down here are the expenses we have salaries and wages first and that refers to w-2 employees but that does not include any payments to the partners because partners which could be members in an LLC are never taxed as w-2 employees now if they're receiving a regular payments that like a salary that's under guaranteed payments to partners which is a deduction for ordinary business income however I don't want you feeling like that's a deduction in a better way to do things because at the end of the day it doesn't actually make a difference and I'll go into more detail in that in my video about paying yourself in a partnership many expenses will just go under other deductions with an attached statement if they don't fit into any of the other categories so that gets us to ordinary business income or law and a lot of people see this tax section at the bottom and get confused these are not taxes that are often applicable to partnerships so that's the main business activity now page 2 and page 3 are just based on informational questions page 4 is schedule K and this is where everything is divided out and it's from schedule K that all of the information flows to the K ones so we can see that final net income or loss from page 1 line 22 it's reported first but then we have two other main types of income net rental real estate income or loss or other gross rental income or loss so if you have amounts in more than one of box 1 2 or 3 then you should have additional statements attached to your partnership tax return that explain how the any activity listed below is related to these different activities essentially it would have made more sense for them to just require a separate schedule K to be used for each activity box 1 2 & 3 these are the three main activities for partnership net income or loss then we have these called separately stated items we can see there's interest income dividends capital gains sale of business assets that's section 1231 property section 179 deduction is a special type of depreciation contributions means charitable contributions so the business doesn't take it instead it goes to your own personal return to see if that partner will qualify for those charitable contributions are not investment interest expense that was a schedule a deduction net earnings are lost from self-employment and t
Thanks Oscar your participation is very much appreciated
- Rogelio Gavette
About the author
I've studied interlinguistics at Indiana University - Purdue University Indianapolis in Indianapolis and I am an expert in soil science. I usually feel rejected. My previous job was mining machine operator I held this position for 7 years, I love talking about magnet fishing and dolls. Huge fan of Olivia Newton-John I practice rhythmic and collect autographs.
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