How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lev Your Own Question
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
Type Your Tax Question Here...
Lev is online now
A new question is answered every 9 seconds

I am setting up an LLC with a partner in WA. I am investing

This answer was rated:

I am setting up an LLC with a partner in WA. I am investing 200K and have 95% equity and he has 5%. I will not be taking a salary, whereas he will (approx 140K/yr). What is the best way of structuring the LLC and my investment from a tax perspective? I am concerned that if it is a direct investment, then he will be liable to pay taxes on 5% of the 200K. I have read that would be preferable to structure the investment as a loan from myself to reduce the tax liability. Also, under these circumstances, I just want to confirm that neither of us should be filing an 83b since we're not treating the LLC as a corporation.

Hi and welcome to Just Answer!


An LLC with several members is generally considered as a partnership.

A partnership is the relationship existing between two or more persons who join to carry on a trade or business.

Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Some additional information about partnerships may be found in IRS Publication 541 -


All business income and expenses are reported on the partnership tax return form 1065 -

Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income -


While the LLC with several members is treated as a partnership and it is not disregarded entity - it is not a taxable entity for income tax purposes. When passing income to members - the type of the income is not changes.


So far you established that ownership is divided in proportion 95-5 between partners. As long as the partnership exists - your partner will not be liable to pay taxes on 5% of the 200K.- however if the partnership interest is sold - your partner's basis will be zero (because no contribution is made) - and he/she will be taxed on the full amount.

Your basis is $200k - so your gain in case the interest in sold will be (selling price - $200k (basis).


If you are a partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct any personal withdrawals made from the business.

Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership.
A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income.
It is very common when some partners receive guaranteed payments and others do not. That is based on agreement between partners.

Thus based on your information - 140K/yr annual compensation for services paid to your partner should be treated as guaranteed payments.


Section 83(a) provides generally that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse) as of the first time that the transferee's rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the

amount (if any) paid for the property is included in the service provider's gross income for the taxable year which includes such time.

Correspondingly - section 83(b) if elected allows to postpone recognition of the gain.

Generally - such election is made when employees are given corporate stocks in exchange for their services. I do not see such election would apply to your situation unless you choose to treat your LLC as a corporation and issue shares to your partner.


Let me know if you need any help.

Please be sure to ask for clarification if needed.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience: Taxes, Immigration, Labor Relations
Lev and 2 other Tax Specialists are ready to help you

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Previous | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA

Meet The Experts:

  • Wallstreet Esq.

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    10 years experience
< Last | Next >
  • Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    10 years experience
  • Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • Richard's Avatar


    Tax Attorney

    Satisfied Customers:

    29 years of experience as a tax, real estate, and business attorney.
  • Robin D.'s Avatar

    Robin D.

    Senior Tax Advisor 4

    Satisfied Customers:

    15years with H & R Block. Divisional leader, Instructor
  • Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
  • jgordosea's Avatar


    Enrolled Agent

    Satisfied Customers:

    I've prepared all types of taxes since 1987.
  • R. Klein, EA's Avatar

    R. Klein, EA

    Enrolled Agent

    Satisfied Customers:

    Over 20 Years experience