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I have a client who started an LLC with other partners. They…

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I have a client who...
I have a client who started an LLC with other partners. They raised 850K for the business with a convertible note from about 5 people. Since it is not equity I assume the 5 people who own the note do not get K-1's if they are not equity partners in the business? So I guess my question is it only people who own equity in the partnership that should get K-1s?
Submitted: 2 years ago.Category: Tax
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Answered in 4 minutes by:
2/12/2016
Tax Professional: Lev, Tax Advisor replied 2 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,856
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Correct - a note would not make partners - these are creditors - and will receive interest income on the note as agreed.

Whether the note will be converted to the partnership interest in future - that is a different issue.
But so far - holders of these notes are not partners and woudl not receive K1.

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Tax Professional: Lev, Tax Advisor replied 2 years ago

A partnership is the relationship existing between two or more persons/entities who join to carry on a trade or business. Each person/entity contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

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

http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

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

http://www.irs.gov/publications/p541/index.html

.

A note is a different relation - that is not a partnership - but a creditor-debtor.

The creditor provides funds and the debtor is obligated to pay the full amount back with interest in a specified manner.

Let me know if you need any help with reporting.

Otherwise,

I appreciate if you take a moment to rate the answer.
Experts are ONLY credited when answers are rated positively.
If you still have any doubts, need clarification - please be sure to ask.
I am here to help you with all tax related issues.

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