New Partnership-Basic Question-Contribution and Earnings split

[KC-CPA]

New client with a new partnership, 2 partners, Operating agreement states 90% owner 1 (individual), 10% owner 2 (LLC). Partnership set up 01/01/2015. The partnership has a net loss of $10k the first year. Owner #1 contributed $13k to the partnership, Owner #2 $0. Owner #2 received a check for $127.00 from the partnership. there are no liabilities or loans in for the partnership. Gross Revenues for first year were $20k.

Here are my questions, which I am sure are simple for many of you but I just want to make sure I get it correct.

Owner #2 did not contribute any capital, the primary purpose of owner #2 is to provide advise/expertise to Owner #1? Operating agreement states that initial capital contribution should be 90% and 10%. What issues do I have with no contribution from Owner #2, other than technically they have no basis or investment in partnership and would not be able to deduct the loss? How should I record this for the partnership? In addition, can I classify the $127.00 as a consulting payment, a withdrawal or guaranteed payment?

Thanks.

[Nashville]

Opaque Partnership Agreement

Ah Yes! Yet another partnership where the partners end up doing whatever they want, instead of abiding by the partnership agreement. It could be worse -- many of our "partnerships" don't even HAVE a partnership agreement.

Others (including some of our own members) take a Cole Porter approach to partnership capital balances (as in "Anything Goes..."). This means the recording of capital balances are not forced into any predetermined ratio. Instead, whatever happens, happens. Under this approach, Partner A has a $13,000 capital balance (credit) and Partner B has a ($127) balance (debit). These balances are before the earnings split.

Guaranteed payments, if not specified in the partnership agreement, should not be applied, so the $127 check should be a distribution. After the earnings split of the $10,000 loss, partner A has a remaining capital balance of $4,000 credit, and partner B has a balance of ($1127) debit. Keep in mind that all splits and guaranteed payments should follow the partnership agreement, and that if the partners do not follow then the capital balances are "whatever will be will be". The agreement may specify different splits for profits than losses as well as capital contributions. The agreement can be complicated as they care to make it.

If my assumptions above are correct, then partner A is able to deduct a $9000 loss, partner B does not have sufficient basis to deduct his loss.

I don't know that I've done anything to help other than run my mouth. Your situation is typical of what we run into with typical partners.

[KC-CPA]

New Partnership-Basic Question-Contribution and Earnings split

Thank You for the reply. Your running of the mouth below is exactly what my thoughts were, as I don't see any other way to handle. Thank your for your comments they were helpful or at least confirmed my thoughts - so we must both be right! :0