New partnership

[oceanlovin'ea]

I am setting up a new partnership for an old client. She and her sister (who lives in another state) are starting a business. They make items that they sell. She said they are 50/50 owners of the business, but in reality they get the money for what they make. Big orders that they do together they split the money. They are really very organized. We set up spread sheets when she started. If they made $400 in a month, based on what order they each made, Partner A made $250 and Partner B made $150. The expenses are divided evenly and deducted from their income. So if they spent $100 on materials that month, $50 would be deducted from what each would get.
They each have or purchased sewing machines and embroidery machines to use for making their product. They did not contribute cash to the business. Their contributions are their equipment. Again not 50/50 exactly.
Is there a question here, you say..................yes. How do I make the 1065 distribute the income and expenses to each partner when it is not a set percentage each month

Oh, also short tax year.....started in middle of the year. It is an LLC with 2 partners......so a partnership return. They have not chosen to be an S corporation. But this is the first year. I am thinking as I am typing this and wondering if that would be a better entity. But they would have to do payroll and they don't really want to do that.
Oh, goodness....my brain is now on overload. Can someone lead me in the right direction? I seem to be going in circles. Give me some suggestions, or tell me where to look for some answers.

I HATE partnerships.

Linda, EA

[TAXNJ]

Tb deluxe edition

You should review TAB 20 in the TB DELUXE EDITION

It discusses the advantages & disadvantages of Partnerships, LLC etc and may guide you

[sandigi]

Guaranteed Payments?

What if you put a "Guaranteed Payments" column in your spreadsheet for each partner? Partner A now has $250 income. Partner B $150 income.

[oceanlovin'ea]

not guaranteed payments

They aren't guaranteed payments. Guaranteed payments are not based on the profits of the company. These payments definitely are based on what they are actually doing.

I have read Tab 20. The example is quite different than my situation so it still left me with many unanswered questions.

Linda, EA

[geekgirldany]

I am going to send you a PM.

You need to look at distributive share for partnerships. They are taxed 50/50 regardless of who got what or if they got anything at all. If they do not want to be taxed on the income 50/50 and want to do it how the income was received then you need to look into Special Allocations.

[Koss]

Choice of Entity

I agree with Dany that in a partnership (or in an LLC that is taxed as a partnership), special allocations can be used to achieve the outcome that your clients are looking for.

But you can't do special allocations in an S-corp. So that's one reason not to make it an S-corp.

BMK

[sandigi]

Guaranteed payments for different levels of services

They aren't guaranteed payments. Guaranteed payments are not based on the profits of the company. These payments definitely are based on what they are actually doing.

I have read Tab 20. The example is quite different than my situation so it still left me with many unanswered questions.

Linda, EA

What they are "doing" is sewing right?

I read again your original post:

"She said they are 50/50 owners of the business, but in reality they get the money for what they make. Big orders that they do together they split the money. They are really very organized. We set up spread sheets when she started. If they made $400 in a month, based on what order they each made, Partner A made $250 and Partner B made $150. The expenses are divided evenly and deducted from their income. So if they spent $100 on materials that month, $50 would be deducted from what each would get."

It sounds to me like they are 2 sole proprietors operating as a pship. When you say they get money for what they "make" are you referring to what they SELL or what they SEW?

I'm still wondering why Guaranteed payments wouldn't work? If they split the expenses evenly 50% each as you stated, and they are “paid” for different levels of service.

TTB Deluxe edition 20.6 Guaranteed payments. "Guaranteed Payments are the equivalent of wages for a shareholder-employee of a corporation. Guaranteed payments are generally based on services rendered rather than a percentage
of partnership income. The flexibility in providing guaranteed payments allows a partnership to compensate partners for different levels of service without requiring special allocations."

[oceanlovin'ea]

will reread

I will reread that section and look at it from another angle and see if that would work. Thanks for your help.

Linda, EA

[oceanlovin'ea]

new twist

Here is another twist to add to all the issues I am trying to figure out. My client lives in Florida and her sister lives in Georgia. So with the partnership or with the s corp, I have to report income to the state of Georgia. and if they are getting W-2 wages I will have to do Georgia unemployment tax too.

Can't think about all of this tonight (oh, it is morning...almost 2 AM)......I'll think about it tomorrow as Scarlett would say.

Linda, EA