LLC-Partnership-Investor

[carolf]

I have a client who created an LLC online. He added the investors as members of the LLC, which implies filing a partnership return.

The three investors didn't intend to be part of a partnership, they just wanted to invest in the business.

What are the options for changing this ownership structure?

Change the LLC filing from multi member to single member?

If we leave the multi member LLC in place, do we have to file a partnership return, or can he file as a sole proprietor with investors?

Am I over thinking this?

Thanks in advance for any input.

[Roland Slugg]

A multi-member LLC must file its federal tax return as a partnership, unless it elects to file as a corporation.

You wrote that the other investors "invested" in the business. That implies an ownership interest, but I suppose they could be treated as lenders. If so, loan documents should be prepared and signed. If everyone agrees to do this, then the LLC will be a SMLLC ... a disregarded entity.

[carolf]

The investor has an agreement with the general member that he will receive 14% of the profits of the business.

Is this treated as a distribution or a return on his investment? What does it look like on the K1?

[Super Mom]

I am surely no expert, still learning when it comes to LLC's. He would simply be a 14% partner, and that percentage would show on the left column of the K-1. I think that would be a LIMITED partner so that he cannot share in any losses. If he receives actual cash or property distributions there is a place on the 1065 and a box on the K-1 for that. You need to track his capital account to see if any of those gains are in excess for capital gains, and I believe there is a separate box for that if so.