In an LLC taxed as partnership, can 1 of the partners be an independent 1099 contractor to provide services for the business?
For example:
Partner #1 Limited Partner (K-1)
Partner #2 Limited Partner (K-1) AND 1099 Contractor - Basically receiving payments as a contractor for running the majority of the business, and as a limited partner (which would account for any money beyond the 1099 payments)
Or does this have to be structured differently for tax purposes?
Thank you in advance to anyone who is so kind as to share their time and wealth of knowledge with me!
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
7y
I agree with Carl Fischer above - you can absolutely do that. You can change ownership interests to compensate one party vs the other (depending on the value of $ vs. services to be provided), or you can simply pay the contractor for services rendered.
Chatting with your attorney and CPA is absolutely recommended so you get the best path forward for profit and protection.
Yes you could do that. You each could also have a W2 salary commensurate with your work. You could also have different share ownership 50/50 60/40 etc.
Have your cpa and/or attorney discuss your options based on your goals.
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
7y
I agree with Carl Fischer above - you can absolutely do that. You can change ownership interests to compensate one party vs the other (depending on the value of $ vs. services to be provided), or you can simply pay the contractor for services rendered.
Chatting with your attorney and CPA is absolutely recommended so you get the best path forward for profit and protection.
Thanks for adding to the answer @Ronald Isgate! To follow up. Are you saying that ownership interest would have to change in order to contract 1 partner to provide services? I suppose that would makes sense.
Basically, if the partnership is currently 50/50, and one is contracted for services, it would have to change to something like:
Partner 1: 90% interest
Partner 2: 10% interest , and then 40% of "profit" would be what's paid out for contracted services (though it wouldn't be considered "profit" since it's written off on taxes and Partner 2 would claim the 1099 on personal taxes as independent contractor).
Or another example:
Partner 1: 70% interest
Partner 2: 30% interest, then 20% of "profit" is paid out for contractor services. (Again, not profit since it would be written off).
I could be completely wrong, but that's what I understood your answer to be saying.
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
7y
Yes - you are correct. Essentially the contractor would get 1099'ed for "services rendered" in the construction/rehab of the property. The amount can be whatever you choose. It cannot be "profit" as you rightly point out. That portion would be paid as an IC for services rendered. The remaining profit would get disbursed as a distribution to each of you in proportion to your ownership interest. Hope that makes sense.