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I am filing the taxes for our LLC. We are a partnership of 4…

I am filing the...

I am filing the taxes for our LLC. We are a partnership of 4 people. These are taxes being filed late since they are for the 2016 year. We were mistaken into thinking that we would not have to report our taxes if zero income was being reported. It turns out that I still have to turn in the 1065 and Schedule K-1 forms to the State of New Jersey.However, we have a discrepancy in the ownership percentages of the partnership. When the LLC was first created, it was between three members, 40%, %30 and %30. A fourth person was added and the owner amended the percentages and in the new operating agreement, the percentages became 40%, 30%, 25%, 5%. The shares were then revised for a 3rd time at %90, %5 and %5 (4th member reduced to member manager), and then a fourth and final time at %47.5, %47.5 and %5.I do not know which percentages to put on the final tax report. The owner had made some errors while generating the operating agreements. For the 2nd and 3rd amendments, me and the 2nd colleague had signed, but the signature of the 4th member was never obtained. The 4th and final amendment was completed without my knowledge, as my signature was forged on the document.When I am placing the final percentages on the 1065 form, from which amendment should I retrieve the numbers from? Should it be the last one that was valid?

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Answered in 9 minutes by:
1/8/2018
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,366
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Welcome to JustAnswer!

My name is***** will assist you today.

You are still able to amend the operating agreement before you file. My suggestion is to meet with the other members of the LLC can formalize a completed and properly executed Operating Agreement.

If for whatever reason you are not able to meet with the other members of the LLC, you should then use the last operating agreement that was properly signed by all members.

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Customer reply replied 1 month ago
Hi Chad, thank you for answering. The shares of the 4th person were reduced to zero on the last amended agreement and their signature was not present. He may have agreed verbally through the phone, but I suppose that does not constitute concrete approval? Would this person be able to sue for their share?Also, the very first percentages were established when we created the LLC with the State of NJ. No operating agreement was drafted at the time. Would this still be okay?

You are able to create a verbal contract, which must be agreed upon by both parties. However, you indicated your signature was completed without your knowledge also.

From what you are stating you have a dispute among shareholders. You should work together to create a current operating agreement. If you can not create a formal operating agreement, then I would suggest basing your return off of the last valid and properly executed agreement. - Typically when someone owns shares, they would be compensated for those shares by the other members. If the 4th partner does not believe he was compensated fairly then they are free to take any steps they believe are necessary to recover their property, if any.

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Customer reply replied 1 month ago
Hi Chad, thank you for the response. I will work them to draft a new agreement. The last one that was drafted, the majority shareholder showed me the agreement and offered me to take a copy. I did not take it but said he would email to me later, which has yet to happen. If he refuses to give me a copy, is there a way I can obtain it? The majority owner is the only one who has access to the LegalZoom account and the State of NJ does not keep these on record.If a member signs an operating agreement but is never given a copy of it, is it still valid?We eventually sold the business and splitting the money became the issue. I accepted a sum and signed a waiver form (to not go after the majority owner legally) and again, I did not receive a copy of the signed agreement.

" If he refuses to give me a copy, is there a way I can obtain it? "

The majority owner did offer you a copy initially. You could draft a letter, send the letter via certified mail and ask request an additional copy. Short of a court order, the majority owner doesn't have to give you a copy, knowing that the majority owner already offered you a copy when you signed the document.

Yes, signing a operating agreement by all memebers would validate the agreement regardless if you received a copy. In this case you were offered a copy and denied the offer and then accepted a sum of money.

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Customer reply replied 1 month ago
Being that he is does not have to give me a copy, if i were to issue a court order for that operating agreement, could he basically shred it and denied it ever existed? It was never scanned, so the only copy is in paper in that person's possession. Also, I received advice from a lawyer that I could claim fraud and inducement, since I was mislead by false facts into signing the document. I agreed to accept a small sum of money at the time and signed the waiver form, but later on I found out that the numbers were incorrect. Some of the money was hidden and not properly distributed. Earlier in the year, I agreed to lower my share based on a circumstance was not true and based on a false promise. Is this a course of action I can take?
Customer reply replied 1 month ago
he does not have to (correction)

We are getting a little carried away. My advice is to first contact the partner in writing and request the copy.

If you are not furnished with a copy and believe you defrauded then you may file a civil suit. Given that you signed the document indicating you wouldn't take action, you would have to prove your allegations.

Do you have any proof that the funds were being hidden? Further did you lose any money because of this?

Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
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Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Customer reply replied 1 month ago
When we started the business, we had originally planned for someone to be the Technology Officer and to have any web domain names under their watch. It was all supposed to be under one account that we could all share. Instead some domain names were bought under an account I made and the rest under the majority owner. Another company had interest in our company name and wanted to buy a few domains. He started to negotiate with them on the main domain name that we used for our website. He ended up selling it to them at a very hefty amount, without my knowledge. The domain name suddenly 'expired' and turned ownership to this other company. His explanation to me was that he forgot to renew it. He only told me about the initial negotiations, but never what happened after that and this weeks after the fact. When this sale was made, the percentages were still %40, %30, and %30, when it was only three members. Two months later, he creates another LLC of our company name in the state of Florida and proceeds to divert those funds under this company name. The income was reported under this LLC when he filed his taxes. The other company decided that the domain names were not enough and decided to come after our trademarks and they started to negotiate again without my knowledge. The reason I knew about this whole ordeal is because this company sent out a legal complaint and I was the first one to receive it. This was all submitted to the courts and included in this legal doc. On top of that, a letter was sent to us from them stating that the main reason for the complaint. They were negotiating and he stalled negotiations by ignoring them. We eventually reached a settlement with them. The majority owner decided that every domain name that was sold as a result of this agreement should go towards his share, when in reality it should have been divided among all of us. This led to a dispute that stalled the transfer of the settlement money. This went on for about 10 months. The lawyer who helped close our settlement got tired of waiting for his fee and decided to send us a legal complaint. Again, I was the only one to be served. The majority owner proceeds to hire another lawyer to take care of this issue but does not mention that we could be represented under this lawyer. I helped with filing the complaint to the courts but was not officially represented under this lawyer. When a settlement was reached, the settlement money was transferred an escrow account at the Lawyer's firm. Then, it somehow made it to the personal bank account of the majority owner. He made excuses that he couldn't trust them or they would not follow his demands, but received the entire sum to himself without our approval. He has been an irresponsible owner with nefarious intentions the entire way. He was going 100 mph without keeping us in the loop. One of the partners is actually is wife, now estranged wife, and was a witness to this whole ordeal. Unfortunately, I did not record any of the conversations that we had, including the night I signed that waiver, but I do have all of the email trails, LLC paperwork and legal documentation to give a broad scope of what he has done. He also used false facts and bullying tactics to lower my share from %30 to %5 and did not give me any percentage in the Florida LLC. I can start by requesting the latest operating agreement from him, but how he will respond is beyond me. If I can at least get him to respond to an email that we indeed had a 47.5/47.5/5 split, would that be enough to question him in court if the document is not sent to me?

I will opt out of your question

Good luck

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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,203
Experience: Taxes, Immigration, Labor Relations
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Hi - I will be glad to help.

Please state your actual question is short and simple manner.

We may address other questions if needed after your original question is resolved.
I am reading your reply - and seems as it contains lots of information and it is hard to sort things out...

Can you please help me and restate your actual questions?

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Customer reply replied 1 month ago
Hi Lev,I will walk you through it. Here was my first question from the conversation above:I am filing the taxes for our LLC. We are a partnership of 4 people. These are taxes being filed late since they are for the 2016 year. We were mistaken into thinking that we would not have to report our taxes if zero income was being reported. It turns out that I still have to turn in the 1065 andSchedule K-1 forms to the State of New Jersey.However, we have a discrepancy in the ownership percentages of the partnership. When the LLC was first created, it was between three members, 40%, %30 and %30. A fourth person was added and the owner amended the percentages and in the new operating agreement, the percentages became 40%, 30%, 25%, 5%. The shares were then revised for a 3rd time at %90, %5 and %5 (4th member reduced to member manager), and then a fourth and final time at %47.5, %47.5 and %5.I do not know which percentages to put on the final tax report. The owner had made some errors while generating the operating agreements. For the 2nd and 3rd amendments, me and the 2nd colleague had signed, but the signature of the 4th member was never obtained. The 4th and final amendment was completed without my knowledge, as my signature was forged on the document.When I am placing the final percentages on the 1065 form, from which amendment should I retrieve the numbers from? Should it be the last one that was valid?

When the ownership percentage is changed during the tax year - there are two issues to address

-- you will need to put percentage as of Dec 31 - the end of the tax year for the partnership

-- for reporting purposes - you will need INTERNALLY to prepare separate returns for each period and calculate shares of income and deductions for each partner during that period.

Then - you will add these amounts to be reported on K1 for each partner.

For instance - the partnership started to operate from Jan 1 till Apr 1 with three partners as 40%-30%-30% - and generated $1000 net income during that period - so that amount will be apportioned as $400--$300--$300

Then - the fourth partner jointed and percentage changed as 40%-30%-25%-5% - which was in effect till Sep 1. The partnership generated $10,000 during that period which is apportioned as $4000--$3000-$2500--$500

and on Sep 1 the percentage was revised again, etc

Then you will add distributive share for each partner for all periods - and these amounts will go on K1.

You may attach explanations with these calculations - so it will be clear for partners how their shares of income are determined.

Questions?

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Customer reply replied 1 month ago
Hi Lev, thank you for the explanation. Yes, our percentages were amended multiple times throughout the tax year but for the last year under operation, we will be reporting no income.Another question I have is about an issue we have with the majority. As I explained above to the previous tax advisor, the majority owner made a transaction without our knowledge. The majority owner sold our main website domain to a third party broker for a large sum of money. Instead of splitting the profit among the partners, this person decided to report to income to his own personal taxes. For year ending 2015, I did not report this transaction because it was done without my knowledge. When we first registered these domains, we made one that was a singular version of our name and one was that was plural. When I first registered the business, I could not recall which one that I associated with the LLC. Can any action be taken against this person?

If there is NO income or deduction items to pass to partners on K1's - these changes of percentages will not make any difference - you will simply use the ownership percentage on the last day of the year.

Any relations between partners are based on the partnership agreement.

There are no requirements to have that agreement in writing - it perfectly may be a verbal agreement,

however in case of disagreement - it would be harder to proof what the agreement was.

Partners definitely may sue other partners and/or the partnership itself.

You should also consider the statute of limitation to sue - normally that is three years.

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Customer reply replied 29 days ago
Hi Lev, I will make note of that. Which kind of lawyer would I seek out if I chose to take action? Also, I am currently working on our partnership return for the year for the State of NJ. I am missing the SSN# ***** one of the members. What would be the proper way to request this from them? Email? Sending a letter in the mail? In the event they decline to share this, what other number can I use in the place of the 'identifying number' on the 1065 and K1?

You might not need to sue - but a mediation.

You may look for mediation service that will help to communicate between partners and come up with the agreement.

If negotiation fails - you would not have other option to give up or sue.

the best way to obtain the tax information including SSN will be to ask each partner to sign form W9

https://www.irs.gov/pub/irs-pdf/fw9.pdf

You will not send this form to the IRS - but will only keep for you records and will use for reporting purposes.

Without tax ID - the partnership will be required to withhold and remit to the IRS 30% of all taxable income reported to that partner.

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Customer reply replied 29 days ago
In this case, all taxable income would be zero. If all else fails, would we still need to report that to the IRS?

You are filing form 1065 - correct?

See instructions page 2

https://www.irs.gov/pub/irs-pdf/i1065.pdf

Who Must File -- Domestic Partnerships
Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes
.

So the first step to verify if filing required.

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Customer reply replied 28 days ago
the 1065 form. We are required to fill it out along with a schedule K-1 form for every partner because there is a $150 for each member in the state of NJ.

Then filing will be required - and you do need all information from partners in order to file.

When the partner doesn't provide personal tax information - $150 due to the partner will be subject to 30% mandatory income tax withholding.

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Customer reply replied 28 days ago
Would that be 30% of that own person's taxable income, unrelated to the business?

On taxable income passed to the partner on K1.

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Customer reply replied 28 days ago
In this case, outside of the $150.00 fee, any taxable passed on to the K1 would still be zero.

If that amount $150 is taxable - you will need to withhold 39% and remit to the IRS.

In additional - without tax ID - you will not be able to e-file - only mail the tax return.

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Customer reply replied 17 days ago
Hi Lev, I called the NJ Division of Taxation yesterday and brought this issue to their attention. The person I was speaking to stated that their was no alternative outside of providing the SSN. If we file the partnership return without that person's SSN, then we would have to send an amended file later. I emailed that person and showed them the forms that need to be filled. I even offered to do this over the phone or for me to send them a formal letter via certified mail. I need the address to send the letter to them. I may have to look up internet records to retrieve if they do not respond. I am in a bind right now. Any advice?
Customer reply replied 17 days ago
there

And - if there will be any damages to you personally or to the partnership because that person is not complying - you may sue him/her for damages and seek a compensation fro your loss and for possible legal expenses.

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Customer reply replied 17 days ago
I was able to find that person's address on the registration certificate. So, I now have that route available. Should I also note in the letter the penalties all of us could suffer if they do not comply? Is there a special stamp from somewhere that I should put on the letter? Do I need to notarize it?

All you need to send certified letter and keep receipts.

Other pre-cautions seem as overreacting.

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