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If 4 people buy unequal amounts of shares in a company and…

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If 4 people buy...

If 4 people buy unequal amounts of shares in a company and put them in an LLC when the annual tax report is due do they equal amounts of the bill or is it pro rata?

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4 of us bought shares in a start up company with no distributions. All bought different amounts of stock. We put them in an LLC. When the tax bill comes do you pay equal parts of that bill or do you pay pro rata?

Submitted: 10 months ago.Category: Finance
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10/1/2017
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Finance
Satisfied Customers: 2,755
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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If the four of your formed a corporation, then profits are distributed to share holders in accordance with the percentage of shares owned.

S Corporations and LLC which are not incorporated are flow through entities and profits flow through to the shareholders. Losses in an S Corporation are limited to the investors at risk amount, along with other considerations.

The tax bill, depending on the type of taxes and the type of LLC (disregarded S Corp or C Corp) may either be paid by the corporation as an expense or passed on to share holders via a reduction in stock basis.

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Customer reply replied 10 months ago
It is an investment with no distributions my friend says when the tax bill comes we pay the bill pro rata. I say we pay the tax preparation every year equally. ? Divided by 4 investors. He says we pay on a pro rata basis.
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

What type of LLC do you have? Did you elect to be taxed as an S Corp or a C Corp?

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

An LLC is a separate entity and shareholders don't pay the tax, the LLC does.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

For an S Corp the corporation itself is not subject to federal income tax, instead the shareholders are taxed upon their allocated share of the income. Form 1120S is the form used for an S Corp's annual tax return.

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Customer reply replied 10 months ago
There is no money in the LLC account!!!!!!! When the tax preparer sends the bill do we pay it prorat or equally???
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Your original question was "When the tax bill comes "

Shareholders don't pay the expenses of a separate entity. The expenses are paid by the LLC. The tax prepares bill would be paid by the LLC which should have a separate tax identification number.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Here is directly from the IRS

"Computing Stock Basis

In computing stock basis, the shareholder starts with their initial capital contribution to the S corporation or the initial cost of the stock they purchased (the same as a C corporation). That amount is then increased and/or decreased based on the flow-through amounts from the S corporation. An income item will increase stock basis while a loss, deduction, or distribution will decrease stock basis."

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

An essential element of starting a successful Limited Liability Company (LLC) is properly funding your LLC. Many new businesses fail because they lack sufficient capital to survive their initial start-up phase.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

The LLC Operating Agreement should have an exhibit that states the amount of your capital contribution. You should make a deposit of that amount into the LLC’s bank account.

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Customer reply replied 10 months ago
Dont make it more difficult Its a simple question. We all bought stock in the same company different amounts of stock and put it into an LLC. When the tax preparer does your year end taxes do all members put the same
amount in the account to pay the bill or do they pay the bill on a prorata basis??? The bill is $2000. I say all 4 people put in $500 Each. He says no!! we pay on a prorata basis of the amount of shares we own.I say NO!!
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

The operating agreement should address the issue of funding.

If you do not have an operating agreement, then first, I would create an operating agreement.

Next, I would pay expenses based on a percentage of ownership because profits will be distributed based on a percentage of ownership via ownership of shares.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

A LLC operating agreement will Sets out rules for how your business will be run and how each member will share in the profits & losses

For Example:

  • Each member’s ownership interest in the business and percentage of the profits/losses – In most cases, a member’s ownership interest and share of the profits and losses are proportional to his or her financial contributions. In other words, if a member contributes 50 % of the business’ startup capital, he or she will typically own half of the business and receive half of the profits and losses. However, this may not work for your business. For example, a member may only contribute 10 % of the business’ capital but may do 60 % of the work, so the owners may determine that that member should have a larger share of ownership and profits.
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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

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