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Ask The Experts: LLC Partnerships

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Q: We are an LLC partnership in Texas. I own 51 percent and my business partner owns 49 percent. This is based on being classified as a minority and woman-owned business. We each operate under our own separate home-based offices.

Can our LLC guaranteed payments be based on individual consulting fees earned in the course of doing business minus expenses and a percentage to put back into the business? For example, one month I bring in $5,000 and my business partner only brings in $1,000.

We plan to split evenly all basic expenses such as Microsoft Office 365, VoIP service, QuickBooks Online, etc. How do we handle uneven expenses such as one partner needing to purchase a printer, attending more fee-based networking events, incurring more mileage charges, or needing health insurance?

A: You can certainly allocate earnings from the partnership unevenly via guaranteed payments, although that is somewhat contrary to the concept of guaranteed payments. A guaranteed payment is usually set at the first of the year and represents payments to partners regardless of the outcome of business or the collection of fees.

You can also allocate the income between the partners in any percentage necessary to fit the agreement of the partners without the concept of guaranteed payments. In other words, if you bring in $5,000 and the other partner brings in $1,000, and there is $2,000 of business expenses, then you simply would allocate a partnership profit percentage of 84 percent and 16 percent, which would allocate the income appropriately for tax purposes and the cash could be distributed in the same manner. The key point is that the profit percentage of each partner does not have to be the same each year, or each month for that matter.

Expenses that are incurred by each partner that are not intended to be expenses of the partnership can also be paid for outside the partnership but still end up being deductible. If a partner pays for a printer, for example, that partner could take an applicable deduction for the business use of that printer on their tax return by adding that amount to their Schedule E along with the income allocated from the partnership.

Keith Hall, NASE Tax Expert