Changing Partner's Allocation

[LindaK]

Hi,

I hope this isn't a duplicate. Husband and Wife formed a LLC in 2004, report on form 1065. 2004 net profits were allocated 50% to each. For 2005, it would be advantageous to split the net profit differently. Can this be done? Are the allocations locked in when the LLC is set up or by the 1st return? Both spouses spend about the same amount of time at the business. Does IRS care if it is 50-50 one year and 70-30 another year?

Thanks,
Linda

[JoshinNC]

ammend the partnership agreement

The partner's can agree to allocate profits and losses under any written formula of their choosing. Maybe a note attached to the return would suffice? Ammendment to the partnership agreement would be the most viable answer, I think.

[Gretel]

Not so fast

It's true, partnerships have the flexiblity of unequal distributions, allocations, etc. That's the beauty of it.

BUT, it needs to have economic effect.

Meaning, the partnerhsip or operating agreement needs to include something, that capital accounts are maintained, a negative capital account restoration requirement upon liquidation, and all assets will be distributed according to their ownership interest then.

[OldJack]

But this entity is a LLC only taxed/filing as a partnership. Units of ownership of an LLC would require profits to be distributed according to the percentage of ownership. An LLC does not have options to allocate profit like a partnership agreement.

[Matt Sova]

Incorrect

As long as you have it stipulated in the LLC Operating Agreement you can split profits based on a percentage other than ownership.

[OldJack]

As long as you have it stipulated in the LLC Operating Agreement you can split profits based on a percentage other than ownership.

If the LLC elects to be taxed as a S-corp it would have to split according to the ownership the same as any corporation. Its no different for it being taxed as a partnership. An LLC is NOT a partnership. The LLC operating agreement has nothing to do with how the profit is required to be allocated, rather how the LLC will be managed or "operated".

[Gretel]

I agree with Matt. Since the IRS doesn't have an animal called "LLC", all the LLC does is based on state law, mainly liability protection.

Default is partnership with all the partnership rules or you elect to be taxes as a corporation and then have to follow the corporation rules.