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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1829
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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A husband/wife LLC setup for a bookkeeping business where one

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A husband/wife LLC setup for a bookkeeping business where one of the spouses does all the bookkeeping work and the other works a separate full-time job and for now just does a few things for the business like take deposits to the bank or pick up a package. The operating agreement has them with a 60/40 split on the profits although one spouse does most of the work (more than 60%). Nothing in the operating agreement about guaranteed payments. What is the best way for draws to be handled (must they be taken as the 60/40 or can the spouse doing most of the work take a larger draw)? Also, would the spouse that doesn't do much for the business be considered passive and not be subject to SE tax?

Thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Anne replied 1 year ago.

Anne :

Hi

Anne :

Thank you for requesting me

Anne :

First I need to know if this is a registered Partnership, or if you were just going to file 2 Schedule C's (Sole proprietor)

Anne :

Hi I see you stepped in

Anne :

Can you please tell me if this is a registered Partnership?

Customer:

It is a registered LLC.

Customer:

Supposed to file 1065.

Anne :

ok........what entity is it registered as? An LLC can be anything from Sole Proprietor to Partnership

Anne :

ok........you're a partnership

Anne :

Do you want to know the easiest way to do this?

Customer:

The best way to be compliant and legally minimize taxes.

Anne :

Ok......you have 2 choices. The easiest one is to cancel the EIN# XXXXX the IRS (and cancel the Partnership at the same time by telling the IRS that this is no longer a partnership)

Anne :

The IRS ruled a few years back that husband/wife businesses do NOT have to be a Partnership, that they could each claim their portion of income/expenses

Anne :

This removes your wife from having to report 40% of the income and pay SE tax

Anne :

You also don't have to file a separate return. You would only need to file Form 1040 (Schedule C)

Anne :

which is part of your Federal tax return

Anne :

If you decide to leave this as a Partnership, then you will file a Partnership return (The form 1065 you mentioned) and you and your wife will get a K1 showing your share of income/expenses based on the 60/40 split

Anne :

Since you are doing the work, you must be a General Partner, which means that you will have to pay SE tax on your 60%

Anne :

Your wife could be a Limited Partner (meaning she invests in the company but does not work for it, and she will not need to file any SE tax)

Anne :

You would have to keep track of the $ your wife puts into the company (if she purchases supplies, gave start up money, etc)

Anne :

You have to keep track of how much money Limited Partners put into a company because they can never take more of a loss than what they invested (or paid tax on in the years the company makes a profit)

Anne :

If it were me, I would use the election for husbands/wives each filing a Schedule C

Anne :

However, you would have to let the IRS know that the Partnership is canceled, or else they will be looking for a Form 1065 for you.

Anne :

This makes your book keeping much more simple, and who ever earns the money pays on the money.

Anne :

However, either way is "politically" correct

Anne :

I got the message you were typing, but nothing appeared on my end.

Anne :

Did you have a comment or question?

Customer:

Ok. Thanks for the detailed response and links. I understand the 2 choices.

Customer:

Do draws from the company have to be in proportion to the 60/40 split?

Anne :

From the partnership? No, but unless you are reimbursing someone for a company expense, the draw is considered to be income

Customer:

Ok. I think that answers my questions. Thanks for all the help and recommendation!

Anne :

You're most welcome

Anne :

Please come back here if you have any follow up questions

Customer:

Ok. This was my first time using this. I appreciate you making it a pleasant experience.

Anne :

I'm glad it was a pleasant experience. It helps when the customer is as informed as you are

Anne :

You may come back even after you rate and pay if you have follow up questions.

Customer:

Thanks so much!

Anne :

You're most welcome. Thank you very much for requesting me!

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1829
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and 3 other Tax Specialists are ready to help you
Expert:  Anne replied 1 year ago.
Thank you very much for the accept and the excellent rating!

Please feel free to ask for me again by putting "for Anne" in the question line if I can help you in the future.

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