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lwpat
lwpat, Attorney
Category: Business Law
Satisfied Customers: 25386
Experience:  Attorney with over 35 years of business experience.
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I have formed an LLC with my daughter. I have put in the capital,

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I have formed an LLC with my daughter. I have put in the capital, she will put in the work. We have agreed (documented in the operating agreement) I will have a 20% interest in the LLC which means I will get 20% of the profits. I am a little unclear how the member's capital accounts are maintained and how the IRS regulations ( sections 1.704-1) apply to my distributions vs her distributions. The reg seems to say I get 20% and she gets 80% and we include this on our tax returns when we file. The LLC gives us a form (can't remember the number right now) documenting the distributions.

I read the regs and they might be interpreted that the percentage of interest can only be determined by the amount of capital invested.
Submitted: 4 years ago.
Category: Business Law
Expert:  lwpat replied 4 years ago.
Thanks for using JA. I will do my best to answer your questions. DON’T FORGET the your deposit is not used to compensate me until you rate my service.

The percentage is not based on the amount of capital although it could be. "sweat equity" can be considered. I assume that you had an attorney review the operating agreement. It is easy to get into business but hard to get out unless you have a written and agreed upon exit agreement if either of you wishes to get out.

The reg seems to say I get 20% and she gets 80% and we include this on our tax returns when we file.

That would be correct. However since she is doing the work she should also draw a reasonable salary and pay the Social Security taxes, etc on that salary.
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