Launched in 2013 - 4 member LLC in which clients paid members vs LLC

[AZ-Tax]

New prospect potential client started LLC. Its a service LLC and instead of the LLC's clients paying the LLC for services rendered, the clients are paying each member. Each member in turn pays the LLC approx 50% of what they received via personal check. Though I am still trying to get clarity on this but I believe each member is paying via themselves, expenses related to this income. The practice has now stopped and the LLC clients from this point forward will make payment for services rendered to the LLC.

I would think each member would need to report the income they received on line 21 (other income) form 1040 OR file a Schedule C. Plus each member will receive a K-1 as the LLC will probably file a form 1065 for tax year 2013. Soun correct?

[ATSMAN]

Sounds like a situation I had a few years back with a LLC. This LLC was involved in taking care of foreclosed houses for various bank. It was a 3 member LLC (Husband, wife and brother in law). For some strange reason the brother in law as doing similar jobs on the side using his own resources but depositing a portion of the income into the LLC account. There was no set formula and the way it was explained is to reimburse the LLC for the time he was not able to do LLC work because he was busy with his own stuff. The three of them decided how much to deposit based on the job.

The way I handled it was to do a Sch C for the brother in law as a separate business. LLC was not involved at all in any way with his side business.

The portion that he was depositing into the LLC was treated like contribution of capital, increasing his basis. LLC filed 1065 and appropriate K1s were generated for all members.

The business folded after 2 years.

[AZ-Tax]

Atsman, did Brother In Law claim ALL income on his Sch C?

/The portion that he was depositing into the LLC was treated like contribution of capital, increasing his basis. LLC filed 1065 and appropriate K1s were generated for all members.

Atsman, did the brother in law claim ALL income as "gross receipt" on his Sch C including the portion he contributied to the P'Ship as Contribution of Capital?

[ATSMAN]

Yes and that was a big point of contention. Finally he saw the light. So 100% of the checks received by the brother in law from his side business was in gross receipts of his Sch C.

Had we done the way he wanted (minus what he deposited in the LLc account) we could have faced an audit when the 1099s did not match to his tax id.

One option that was discussed is if all the members agreed his capital contribution could be returned from the LLC without any adverse tax consequences to him. His basis would go down.