how to do taxes for partnership llc operating [FAQs]


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Last updated : Aug 29, 2022
Written by : Gale Bowthorpe
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how to do taxes for partnership llc operating


Comment by Teresia Irons

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 Teresia Irons, have a nice day.
- Gale Bowthorpe, Staff Member


Comment by Shawana

my name is Bradley Cooper no not that Bradley Cooper I'm Bradley Cooper the CPA I'd like to talk to you a little bit today about LLC's taxed as partnerships first of all we need to understand what an LLC is an LLC is a legal entity and all the states of the Union have these LLC's however an LLC is taxed by the Internal Revenue Service the Internal Revenue Service only has three ways that it can tax businesses in this country sole proprietors partnerships and corporations so if you want to have an LLC you must choose which way that you can tax that LLC and the IRS doesn't care which way you choose however if you're a single member LLC you cannot file as a partnership a partnership is two or more individuals engaged in an activity for profit if you're a single member LLC you cannot file as a partnership but you can file as a partnership or corporation if you have two or more members there are usually two different kinds of partnerships there's a general partnership in a limited partnership the general partnership is where the partners share duties and responsibilities and obligations they're each responsible for some aspect of the business a limited partnership has a general partner in limited partners the general partner in that situation is the person that is responsible for the day-to-day operations the management of the company and the operations the limited partners are usually just investors there usually are investing so that they will receive a share of the profits many people ask who can be a partner in a partnership just about anybody can be a partner in a partnership individuals corporations are the partnerships estates trust there really is no limit on who can be partner many people ask me about husbands and wives if they are partners in a business or they treat it as a partnership unless they file a partnership tax return the answer is yes if they are a partnership even though they're husband and wife they are required to file a partnership tax return now there are some exceptions of that so if you think that you qualify for an exception so if you think you would like to get out of filing the partnership tax return look and see what some of those exceptions are there are many advantages to filing as a partnership the biggest advantage in my opinion to filing as a partnership is that partnerships allow you to allocate profits let me give you an example let's say that partner a B and C decided to go into business to build houses partner a B and C decide that they want to build house number one and that they're going to split the profits equally on house number one after house number one is completed partner C decides that they do not want to be a part of the next project maybe they're too busy with other things at that time and they can't devote enough time to that project so they just bow out so partner a and B split profits equally among themselves on that project and then partner C decides that they do want to come in on that project so therefore at the end of the year when we add up the profits for all three projects then we will allocate the profits based on each project not based on the income at the end of the year so therefore these partnerships are very flexible as to how they are going to allocate profits they can also allocate profits one way and allocate losses another way so a lot of flexibility when it comes to allocating profits and losses in equity when it comes to partnerships another advantage to partnerships is the term guaranteed payments now in the corporate world what we would look at is if an owner worked in the company the company would have to pay them a wage now what that entails is is the company has to deduct taxes from those wages they have to pay those taxes into the IRS either monthly or quarterly they have to file tax returns with the Internal Revenue Service every quarter and annually and they have to file w-2s for that employee as well if you're a partnership you will not be an employee of the partnership you're still a partner all we're doing is allocating funds to you as a wage and we call that a guaranteed payment now those guaranteed payments are going to be given to you not only form w-2 like a wage is going to be given to you but its own form k1 and those guaranteed payments are taxed for income tax purposes and for Social Security tax purposes some of the disadvantages of a partnership is that the profit of the partnership is all subject to income tax and Social Security tax now there are two different kinds of activities that a partnership can be involved in when it comes to Social Security tax one is that in operations activity meaning if it performs services for someone such as an accountant an attorney a bricklayer a painter a plumber any of those kinds of folks that perform services for others or if they are in retail or wholesale sales and they are selling things the profits for those companies are all subject to Social Security tax there are some activities that are not subject to Social Security tax and that's usually in the area of rental real estate so if the partnership rents real estate then the income generated from those activities are subject to end some tax but not Social Security tax another disadvantage of a partnership is the complexity of the tax preparation partnership taxation is very complex there are a lot of laws that deal with partnerships and many many exceptions to how things are done if you don't understand these concepts please find someone who does at the end of this segment you should know enough about partnership taxation to question your tax preparer to make sure that they understand at least as much as what you understand if they don't please find someone else we prepared partnership tax returns for many people located throughout the United States if you need some help and would like us to assist you in the preparation of those tax returns please let us know when we'd be glad to do so one of the other disadvantages of a partnership is that losses are limited to basis so let me explain basis so that you understand what that means basis starts with monies that you contribute to the partnership it is reduced by monies that the partnership gives to you that are classified as distributions it increases by profits that the partnership generates and reduces by losses that the partnership incurs let me give you an example let's say that in year one you contribute $10,000 to the partnership and during the year the partnership distributes $2,000 to you you now have a basis of $8,000 if the partnership loses $12,000 then you have a basis of negative $4,000 let me explain to you what a another way of saying that when you receive your information from the partnership that indicate your share of the losses were $12,000 remember your losses are limited to the basis and your basis is only $8,000 therefore you can deduct $8,000 on your personal tax return the other $4,000 is considered a suspended loss and that will be carried over to next year so let me tell you how that is deducted next year again we now have a basis of zero in suspended losses of $4,000 if next


Thanks Shawana your participation is very much appreciated
- Gale Bowthorpe


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