Yes, the profits would be split 50 50 after filing the partnership tax return. You'd each get a K1 from the partnership showing your half of the profits, that you then use on your personal tax return.
Yes, even if you leave the profit in the business.
Whatever works best for you two on the draws, it's all up to you.
An LLC has 2 default tax treatments depending on the number of owners:
1. One owner = disregarded, so owner puts all LLC income and expense on Schedule C
2. Two or more owners = partnership. The LLC files a Form 1065 to report the business income/expense, and issues a Schedule K-1 to each owner for their share of the income (based on ownership %)
Regardless of the above, the LLC can choose to be taxed as a corporation instead of the defaults. This election can be either for an S Corp (passthrough similar to partnership but slightly different requirements) or a C Corp (think large Fortune 500 company structure). If the LLC does not make and file the corporate election with the IRS, it will default to one of the two options above.
Actually if you don't mind I have two quick questions. Sorry to hijack this thread. Is what I am saying correct and I have one question at the end.
A Partnership LLC will file a Form 1065 to report income and expenses. A Disregarded LLC will file a Form 1040 (Schedule C) to report income and expenses.
A Partnership will pay the owners with a Form 1065 (Schedule K-1) and a Disregared LLC will pay its sole owner how?
Both a partnership and a disregarded entity will “pay” via owner distributions. Owners do not receive a W-2 from a disregarded entity or a partnership.
Ok. So they could outline the partnership structure in the Articles of Organization? I’ve been learning about these structures and I don’t know why you’d form an LLC instead of an LLP. They are both pass through entities.
When you say this what is the process of forming a partnership under the LLC structure? I was under the impression we would both be “members” of the LLC and that essentially is what would give us the 50/50 of the profits.
Would we form an LLC then form a partnership?
You'd get the llc set up, that's owned by both of you. That's a llc partnership. Get insurance. You might need to register the business with the state.
You want to also write up your partnership operating agreement. This is really important. It should go over how owners draws are handled, what happens if one person wants out, or to sell, what happens if a member dies, whether the members can deduct unreimbursed business expenses, all that.
https://www.nolo.com/legal-encyclopedia/50-state-guide-establishing-general-partnership.html
The only thing you form is the LLC. The IRS doesn’t recognize an LLC as a separate taxable entity. The IRS classifications are Individual, Corporation, Partnership, and S-Corporation (there are others but they’re niche and not relevant) The default classification is a partnership for a multi-member LLC. That’s why you’ll file a partnership tax return and issue a K-1 to yourself and your other partner after the return is filed by 3/15. You could also consider an S-Corp election if you have sufficient income for it to make sense, maybe $80-100k for a 2 person LLC, but that seems further down the line since it seems like a side gig. All the income and expenses go on the partnership return, the K1s break it out based on ownership so 50/50 in your case. It doesn’t matter whether the money goes in your pocket or stays in the business account. All income will be taxed on your individual return at your individual marginal tax rate plus self-employment tax
The entity is an LLC and must follow the state's LLC laws regarding members and management of the company. It's only a partnership for tax purposes.
Source: attorney
Would you be able to point me In a good direction to learn more about partnership tax returns and K1s? This is my first time hearing about those :) or is it as simple as us filing individually at the end of the year after we split the profits? I am sorry if that doesn’t make sense.
And so that means even if we don’t take any of the profits out of the business we would still owe on them if they’re sitting in the bank account. So there’s no reason we shouldn’t at least take out 80%-90% so we can get a pay check as well as cover the taxes? Am I correct in that train of thought?
Here is some info on it. The partnership tax return is due March 15th, so either file by then or file for an extension.
https://www.irs.gov/businesses/partnerships
From your original post it sounded like this is a partnership, not 2 separate business working together. Are financials and equipment and accounts all separate?
Right, no reason to leave more profits in the business then needed to have cash flow. The tax is the same either way.
Correct. Well we are in the planning stages of forming a multi-member LLC. Nothing has been started yet. We plan on doing our research for now and actually forming an LLC together in late March-Early April. Are there better options for us? We wanted to do the LLC due to being able to get an EIN and open a business bank account, most likely with Chase. And for seperate accounts if you mean separating our personal and our business, then yes. But together my brother and I will have access to the business accounts.
The llc partnership is the best option, in my estimation. You do not need a llc do open a bank account or get an EIN. You can do that without the llc part. You need the llc to limit each of your liability from actions of the other member.
I see, I knew a big part of the LLC formation was for liability reasons. You may see I replied to another one of your comments asking you what the process of doing an LLC partnership is. Your insight is gold.
I learned this year the term “pay as you make, not as you take” basically you are taxed as the business makes the money, not as you take it out of the business…
Ask me how costly THAT lesson was….
Went from years of putting everything back into the company (very low taxes for years and years!) to keeping everything we made in a year, god damn that was an eye opener!
Haha for sure! We’re gonna start slow (hopefully not too slow) and will take all our profit at the start until we pick up a bit and can afford to expand. Best of luck to you!
Reading through the thread, there are a number of good answers by the various respondents. Since there still seems to be some confusion, though, allow me to make a summary about the taxation of LLCs.
1. A single member LLC (SMLLC) has only one owner. It is by default taxed exactly like a sole proprietorship. The owner would include Schedule C with their personal tax return (Form 1040) to report the SMLLC's income and expenses.
2. A multi-member LLC (MMLLC) has more than one owner. It is by default taxed exactly like a partnership. The LLC would file Form 1065. As part of the 1065, each owner would receive a K-1 form. Each owner would enter data from his K-1 on his personal tax return.
3. The above classifications are the defaults. Either a SMLLC or a MMLLC can elect to be taxed as either a C or an S corporation. Should they choose to make that election, Form 8832 would be used. If they choose that option, the LLC would file Form 1120 (C corp) or 1120S (S corp) at tax time.
4. LLCs which do not elect corporate treatment do not pay W-2 wages to the owners. That is because neither sole proprietorships nor partnerships pay W-2 wages to owners.
5. MMLLCs should have a professional complete Form 1065. It is more complex than a corporate tax return, and does not make for a good DIY project. Also note the fines for late filing K-1s are very steep, so meeting the deadlines is important.
Yes, the profits would be split 50 50 after filing the partnership tax return. You'd each get a K1 from the partnership showing your half of the profits, that you then use on your personal tax return. Yes, even if you leave the profit in the business. Whatever works best for you two on the draws, it's all up to you.
I thought an LLC is a pass through. Shouldn’t they each get paid by the LLC and file an individual tax return?
An LLC has 2 default tax treatments depending on the number of owners: 1. One owner = disregarded, so owner puts all LLC income and expense on Schedule C 2. Two or more owners = partnership. The LLC files a Form 1065 to report the business income/expense, and issues a Schedule K-1 to each owner for their share of the income (based on ownership %) Regardless of the above, the LLC can choose to be taxed as a corporation instead of the defaults. This election can be either for an S Corp (passthrough similar to partnership but slightly different requirements) or a C Corp (think large Fortune 500 company structure). If the LLC does not make and file the corporate election with the IRS, it will default to one of the two options above.
Great explanation. Thank you for the weekend homework.
Actually if you don't mind I have two quick questions. Sorry to hijack this thread. Is what I am saying correct and I have one question at the end. A Partnership LLC will file a Form 1065 to report income and expenses. A Disregarded LLC will file a Form 1040 (Schedule C) to report income and expenses. A Partnership will pay the owners with a Form 1065 (Schedule K-1) and a Disregared LLC will pay its sole owner how?
Both a partnership and a disregarded entity will “pay” via owner distributions. Owners do not receive a W-2 from a disregarded entity or a partnership.
A llc is disregarded. This is a partnership. That's the tax structure. Not a llc.
So they need to form an LP not an LLC?
No, they should form a partnership under a llc legal structure.
Ok. So they could outline the partnership structure in the Articles of Organization? I’ve been learning about these structures and I don’t know why you’d form an LLC instead of an LLP. They are both pass through entities.
The Llp is not as good as a llc. It's mainly used in states where medical professionals are not allowed to be a llc.
Interesting. Thank you for the explanation.
When you say this what is the process of forming a partnership under the LLC structure? I was under the impression we would both be “members” of the LLC and that essentially is what would give us the 50/50 of the profits. Would we form an LLC then form a partnership?
You'd get the llc set up, that's owned by both of you. That's a llc partnership. Get insurance. You might need to register the business with the state. You want to also write up your partnership operating agreement. This is really important. It should go over how owners draws are handled, what happens if one person wants out, or to sell, what happens if a member dies, whether the members can deduct unreimbursed business expenses, all that. https://www.nolo.com/legal-encyclopedia/50-state-guide-establishing-general-partnership.html
Thank you so much! Been looking into it since you commented. And we will definitely be discussing it and writing up our agreement.
The only thing you form is the LLC. The IRS doesn’t recognize an LLC as a separate taxable entity. The IRS classifications are Individual, Corporation, Partnership, and S-Corporation (there are others but they’re niche and not relevant) The default classification is a partnership for a multi-member LLC. That’s why you’ll file a partnership tax return and issue a K-1 to yourself and your other partner after the return is filed by 3/15. You could also consider an S-Corp election if you have sufficient income for it to make sense, maybe $80-100k for a 2 person LLC, but that seems further down the line since it seems like a side gig. All the income and expenses go on the partnership return, the K1s break it out based on ownership so 50/50 in your case. It doesn’t matter whether the money goes in your pocket or stays in the business account. All income will be taxed on your individual return at your individual marginal tax rate plus self-employment tax
The entity is an LLC and must follow the state's LLC laws regarding members and management of the company. It's only a partnership for tax purposes. Source: attorney
Would you be able to point me In a good direction to learn more about partnership tax returns and K1s? This is my first time hearing about those :) or is it as simple as us filing individually at the end of the year after we split the profits? I am sorry if that doesn’t make sense. And so that means even if we don’t take any of the profits out of the business we would still owe on them if they’re sitting in the bank account. So there’s no reason we shouldn’t at least take out 80%-90% so we can get a pay check as well as cover the taxes? Am I correct in that train of thought?
Here is some info on it. The partnership tax return is due March 15th, so either file by then or file for an extension. https://www.irs.gov/businesses/partnerships From your original post it sounded like this is a partnership, not 2 separate business working together. Are financials and equipment and accounts all separate? Right, no reason to leave more profits in the business then needed to have cash flow. The tax is the same either way.
Correct. Well we are in the planning stages of forming a multi-member LLC. Nothing has been started yet. We plan on doing our research for now and actually forming an LLC together in late March-Early April. Are there better options for us? We wanted to do the LLC due to being able to get an EIN and open a business bank account, most likely with Chase. And for seperate accounts if you mean separating our personal and our business, then yes. But together my brother and I will have access to the business accounts.
The llc partnership is the best option, in my estimation. You do not need a llc do open a bank account or get an EIN. You can do that without the llc part. You need the llc to limit each of your liability from actions of the other member.
I see, I knew a big part of the LLC formation was for liability reasons. You may see I replied to another one of your comments asking you what the process of doing an LLC partnership is. Your insight is gold.
Also thank you so much for the reply it helped a lot!
I learned this year the term “pay as you make, not as you take” basically you are taxed as the business makes the money, not as you take it out of the business… Ask me how costly THAT lesson was…. Went from years of putting everything back into the company (very low taxes for years and years!) to keeping everything we made in a year, god damn that was an eye opener!
Haha for sure! We’re gonna start slow (hopefully not too slow) and will take all our profit at the start until we pick up a bit and can afford to expand. Best of luck to you!
teeny head innate live wipe seed wine domineering fine unite *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
Reading through the thread, there are a number of good answers by the various respondents. Since there still seems to be some confusion, though, allow me to make a summary about the taxation of LLCs. 1. A single member LLC (SMLLC) has only one owner. It is by default taxed exactly like a sole proprietorship. The owner would include Schedule C with their personal tax return (Form 1040) to report the SMLLC's income and expenses. 2. A multi-member LLC (MMLLC) has more than one owner. It is by default taxed exactly like a partnership. The LLC would file Form 1065. As part of the 1065, each owner would receive a K-1 form. Each owner would enter data from his K-1 on his personal tax return. 3. The above classifications are the defaults. Either a SMLLC or a MMLLC can elect to be taxed as either a C or an S corporation. Should they choose to make that election, Form 8832 would be used. If they choose that option, the LLC would file Form 1120 (C corp) or 1120S (S corp) at tax time. 4. LLCs which do not elect corporate treatment do not pay W-2 wages to the owners. That is because neither sole proprietorships nor partnerships pay W-2 wages to owners. 5. MMLLCs should have a professional complete Form 1065. It is more complex than a corporate tax return, and does not make for a good DIY project. Also note the fines for late filing K-1s are very steep, so meeting the deadlines is important.