Tuesday, September 14, 2010

Guaranteed Payments

Guaranteed Payments are payments made from a partnership to a partner regardless of the partnerships profitability. Guaranteed payments are deducted from partnership income in determining the distributive share of partnership gain or loss for the year. Guaranteed payments are a partnerships form of payments to partnership, similar to wages in an corporation. For instance, if a partnership earns $800,000 for the year, with two partners, and each partner receives guaranteed payments of $150,000, the distributive share of partnership profits would be $500,000 ( $800,000 profit - $150,000 to each partner). The partners would receive $400,000 each, $150,000 in guaranteed payments subject to SE tax, and $250,000 of distributive profit, subject to SE tax if both partners are general partners.

Thursday, September 9, 2010

Single Member LLC to Multiple Member LLC

A single-owner LLC is a "disregarded entity" assuming it has not made the election to be taxed as a corporation. If the single-owner LLC brings on a new member, the entity ceases to be a disregarded entity and a partnership is created for federal tax purposes. If the new owner pays the old owner for an interest then a deemed sale of assets occurs and the old owner recognizes gain or loss. If the new owners contributes money, then the adjusted basis changes for the old owner to reflect the new percentages of ownership.

S Corporation Conversion to LLC

An S-Corporation convert to an LLC - that elects to be taxed as a corporation - with a tax free reorganization. With IRC Section 368(a)(1)(F) a reorganization can take place if the basis and holding periods of the assets in the new LLC were the same as in the S-Corporation before the reorganization takes place.

Monday, September 6, 2010

LLC Member and Limited Partners

Limited partners in a partnership, have their liability classified to included the amount of their investment. A general partner in a partnership on the other hand, hold unlimited liability to the debts and obligations of the partnership. General partners pay SE tax on their distributive share of income from the partnership, while limited partners do not.

The IRS regulations currently facilitate that logically, an LLC member who is personally involved with an LLC, likely should be subject the SE tax. The best way to handle this, is with guaranteed payments from the LLC to the members - subject the SE tax, with the distributive share not subject to the SE tax. This is similar to an S-Corporation, where reasonable wages are paid, and the distributive share is non-taxable.