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You there? I'm in a two member LLC partnership with a friend…

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I'm in a two member LLC partnership with a friend and incorporated in Delaware with an EIN such that we can setup a business bank account. Our bank account is in California, do we file taxes in Delaware or California?

Accountant's Assistant: Is there anything else the Accountant should be aware of?

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12/27/2017
Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,146
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

Where does the LLC/partnership do business? In Delaware, California, or both?

Where do the two partners reside?

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Customer reply replied 5 months ago
We are a contracting business. Our intentions were to operate online, however, during the latest contract we both resided in California and worked onsite. Now one remains in California and the other moved to Florida.

If the LLC was formed in Delaware, but conducts its business in California, the LLC/partnership will file a federal return and a state return return in California.

Since partnerships are "pass through" entities, the partners report any profit/loss on their personal tax returns.

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So the partnership will file a federal Form 1065 and a state return in CA. The 1065 will include a K-1 to each partner. Each partner then includes the information on his personal tax return. There is no personal income tax in FL, but the partner living in FL will be required to file a CA nonresident state return to report the CA source income.

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Customer reply replied 5 months ago
1) The business has a California bank account but did not complete the Good Standing & Foreign Qualification process. We are a Delaware company with a registered EIN, but do we need to complete the above process to be on the California registry.
2) If one member did more contract work for the company, do we deposit his earnings as a "gauranteed payment" to his personal account reflecting the more earnings he did for the company and record that on a schedule K. The membership is 50/50 but what happens if members keep money in the business account?

Yes. You will need to complete the Good Standing and Foreign Qualification process in CA.

The payments to partners are shown on the partnership return (Form 1065) which is reflected on each partner's K-1.

The decision of whether a partnership retains profits in the business bank account does not have tax consequences because the partners are taxed at individual income tax rates regardless of whether they retain or withdraw their earnings.

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Customer reply replied 5 months ago
Are there any penalties for 2017 taxes if the Foreign Qualification for California is not approved until early 2018. If we start the process now (today) anything else that we need to be aware of to ensure everything is prepared for filing taxes in March/April?

As to taxes, CA is simply concerned with taxes being paid.

My best advice would be to submit the Foreign Qualification paperwork as soon as possible. It appears that the processing time is running about a week or so behind right now.

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Customer reply replied 5 months ago
Great. My final question moving forward. If the two-member LLC is 50/50, how are distributions handled properly. In our situation this year, the capacity of work done by one member is more than the other (hence generated more income for the company). Is it best to reflect this as a gauranteed payment to the the other member's personal account (acknowledging more work he's done). But how does this affect the 50/50 distribution if more income goes to the other member?

A partner can receive guaranteed payments for his work.

The 50/50 distribution applies to the distribution of profits.

See the following: http://www.varnumlaw.com/blogs/varnum-etc/guaranteed-payments-the-equivalent-of-a-salary-for-llc-members-and-partners/

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Customer reply replied 5 months ago
Excellent. Thanks again for your patience. One last question I just thought of, If we do foreign qualification in CA, do we need to pay annual franchise tax for both CA and DE?

My pleasure.

You will file an annual report in DE and pay DE franchise tax.

Likewise, in CA.

My goal is to provide you with excellent service. Please take a moment to rate my answer with a 5-star rating to let me know that I have achieved my goal.

Thank you.

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Customer reply replied 5 months ago
you did! Thank you very much!

You're welcome.

Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,146
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Happy Holidays to you and your family!

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