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LLP accounting and tax question

I am working with a new law firm that has presented the following way they plan on paying the two partners. No one else is a professional in the firm.

They have proposed the following:

Partner that brings in the account gets 1/3 of the revenue; partner that does the work gets 1/3 of the revenue, the remaining 1/3 stays in the LLP account to cover operating expenses.

The question is how does one report the payments to the partners for wither the first or second 1/3. As an LLP any profits will be credited to the partners based on their partnership shares.

However since the other payments are totally unrelated to the partnership shares would these payments then be treated as if the partners were independent contractors with the payments being reported on a 1099. This is especially important since one of the partners is expected to do more of the work and bring in more of the accounts in the first 12-18 months.

If you issue a 1099 does it raise questions with the IRS that a partner is getting payments as an independent contractor. Clearly these payments would reduce the LLP income but since the partner will have to report the 1099 income the IRS is not hurt by this method.

If this isn't the way to do it how should it be done.

Thanks.

 

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anon,

I've not tried the 1099 route, where a principal is also a vendor. This seems strange to me, but it might be kosher (check with your tax atty).

The way I've done it is to do exactly what you are saying, and call that "substantive economic effect". You don't have to distribute based on the shares so long as you have an agreement that makes economic sense. Your 3/3/3 approach seems to make pretty good sense, so I'd use that for all the distributions.

Cheers,

KP

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

It's a straight Membership/Partnership agreement. (Think interest on capital, "salary" and percentage of remaining profit).

The K1 shows the total paid to each partner, how the money is ultimately divided, is up to the partners.

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