We are two members in an LLC Company, split 50/50 on everything. Not clear on Schedule K/K-1 instructions

[theleeb]

Hello, Schedule K instructions for the Analysis of Net Income (Loss) per Return says "Report all amounts for LLC members on the line for Limited Partners".  The software enters the net income in the (iv) Partnership column even though we are individuals and we each report ourselves as individuals on line I1 on Schedule K-1, “What type of entity is this partner?”.  And Schedule K also reports the income on row 2b, Limited Partners instead of 2a, General Partners.  I am not sure why the Schedule K instructions direct LLC members to report as Limited Partners. This is confusing to me and I am wondering if there is an explanation.  Afterall, we are hardly limited as we both perform all the activities and services of the business.

On Schedule K-1, Item G, I selected “General Partner or LLC member-manager”.  But this is in conflict with the Analysis of Net Income (Los) per Return section, as described above.   I view our structure (and business, for that matter) as very simple.  The Form 1065 and Schedule K/K-1 instructions seem to make reporting more complicated than it needs to be!

Any assistance would be greatly appreciated.

[tagteam]

Are you using TurboTax Business?

I am going to page Champ @Rick19744. Please wait for a response.

[Rick19744 · Accepted solution]

A few comments on your questions:

• In general TT is a software for the masses and in general the programmers do a good job in a complicated area.  Sometimes these minor details get lost in the overall picture of getting the final product correct and miss some of the minor cosmetic areas.
• In general, limited liability members are limited partners in the legal sense and most likely the brief section in the instructions are just describing the "general" rule.  Instructions are also not the model of technical depth and clarity in many situations.
• Based on your facts, make sure you  go into the partner / member information section of TT and check the appropriate box as to which member is a "general partner or LLC member-manager".  
  • Based on your facts I'm not clear as to whether you have done this or just "overridden" the Schedule K-1.
  • Hopefully making this change in the partner / member information section will clear up the Analysis of net income section.
• Keep in mind that the Analysis of net income section has no impact on whether the bottom line and allocation is technically correct.  As such, if the above does not resolve the issue I would not stress.  Alternatively you could call TT and ask why the software is handling this section in the manner you describe.  However, this time of year staffing may be limited.
• Finally, I assume you have handled this correctly, but just make sure that you have indicated within TT that this is a limited liability company filing as a partnership.  This is missed sometimes as individuals just assume partnership instead of the LLC distinction.
• Finally number 2, partnership tax gets complicated very quickly.  So while you may believe your structure is simple, getting to the correct result is a complicated matter.

[theleeb]

Thank you for the information.  I am still not clear on whether we would select, for Part ll Item G, "General partner or LLC member-manager" or "Limited partner or other LLC member".  I assume we have to select one or the other per the IRS instructions.

We do not have a designated managing partner in our Operating Agreement, we are both simply members of an LLC.  There are no other members but for us two.  We both fully participate in the business of the company as cosmetologists.  So in that sense, we are not limited partners either.  

For Item H1 we check "Domestic Partner".  And for Item I1, "What type of entity is this partner?" we check "A" for active individual. 

For whatever reason, Part lll, Box 14, "Self-employment earnings (loss)" is empty even though Box 1, "Ordinary business income (loss)" includes a positive amount of about $20K for each of us (not a great first year but we'll hopefully grow).  This may be due to the fact that we checked "Limited partner or other LLC member".

Reading the IRS Instructions, I see this:  "Generally, a limited partner's share of partnership income (loss) isn't included in net earnings (loss) from self-employment. Limited partners treat as self-employment earnings only guaranteed payments for services they actually rendered to, or on behalf of, the partnership to the extent that those payments are payment for those services."   There are no guaranteed payments in our business operations. 

But again, we are not limited in the context of our ability to manage the LLC business.  So, in that sense, we are both actively managing the business?  Even though neither of us are identified as a "managing partner" in the LLC Operating Agreement...although the agreement describes our LLC as a ""Multiple Member-Managed Limited Liability Company".  Hmmmm, maybe I answered my own question?  Perhaps we would each select General Partner after all....even though page 58 of the IRS Instructions for Form 1065 for reporting Analysis of Net Income (Loss) per Return says, "For each type of partner shown on line 2, enter the portion of the amount shown on line 1 that was allocated to that type of partner....report all amounts for LLC members on the line for limited partners.  Again, this guidance adds to the confusion.

Any assistance would be much appreciated!

[Mike9241]

A limited liability company (LLC) managing member is both an LLC owner and someone who keeps the business running on a day-to-day basis. The managerial aspect generally includes having the authority to make decisions and enter into contracts on behalf of the business.

In a member-managed LLC, all owners (members) also act as managers who can serve as agents of the business and bind the business contractually. Specific responsibilities of individual members can vary depending on what the members of that particular business decide is best for the company.

A member-managed LLCs can have more than one manager.

In your situation, I see nothing wrong with not checking the limited partner/ other LLC member box

[Rick19744]

Based on your facts, you both are active in the business operations, and as such, are material participants.

If you do not check the box "LLC member-manager", TT will not report the income as SE income; as you have noted in your response.  This income should be subject to SE income tax and the only way to get TT to report that in box 14 is to check the box as noted above.

Don't get hung up on the semantics of "limited liability" based on your question and facts.