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In a 2-member LLC, one partner puts in 75% of the money, the other puts in 25%. However, BOTH have a 50/50 company interest. Partner one has a 50% profits interest, 50% company interest and a 75% loss interest. Partner two has a 50% profits interest, 50% company interest and a 25% loss interest. Basically, equal "powers", but one puts more money in and absorbs more of the losses. So, in a loss year, what do I put for Sched B-1, Part II, item iv? ? Anything for partner 2? He would have a 25% loss...there is no profit, so I don't think you consider that....and he would have 25% of the capital. Help! I think partner 1 = 75% (he "owns" 75% of the losses), and partner 2 = 50% (he owns 50% of profits, even though there aren't any). Trouble is, our in house lawyer is arguing that you wouldn't put partner 2 on there. That you wouldn't consider partner 2 loss, and that partner has a max % of 25 and wouldn't be listed on the schedule. Anyone have input and, hopefully, some definitive reference? |
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"Complete columns (i) through (iv) below for any individual or estate that owns, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership (see instructions)." It appears to me that the instructions on the form itself are pretty clear - partner 2 has a 50% interest in the profit of the company, even though there is none in the current year. |
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I agree with Shane. Partner 1 column (iv) would be 75% (his loss percentage) and parner 2 would be 50% (his profit and capital percentage). Schedule B-1 relates to the partners' interests - unrelated to the financial results for the current year. |
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From what I can determine both should be filled in. Since both have 50% profit which meets the test. The real difference is the amount of loss each can share. The smaller investor is limited to a smaller share of any loss up to the amount he has contributed. Since the one member has put up a larger share he gets a larger amount he can deduct a larger loss. Once the smaller investor has used up his equity he could no longer deduct the loss but the larger investor still might be able to deduct additional losses if they occur. |
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I'd say that both members need to be listed as they are 50/50 owners of the company - see your note about 50% company interest. The division of profits and losses is NOT ownership. Its nothing more than an agreement on how to split the profits and losses AND this can (and frequently does) change from year to year. And when you start taking tax advice from an attorney you get everything you deserve. I have yet to meet an attorney who knew what he was talking about. As a side note, in the mid 1990s I had an attorney ask me to leave his office. He had told the client (a C corp) that they HAD to have cash in the bank equal to Retained Earnings, since that is what Retained Earnings meant! The division of profits and losses may not be ownership in the sense we normally think, but the instructions for B-1 state: "List each individual or estate owning, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership at the end of the tax year." So someone who has a 25% ownership interest but for some reason has a 50% share of the losses would need to be listed.
(03 Jun '10, 13:13)
Tom
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