All Forum Posts by: Naz Hossain

@Naz Hossain

Sorry. I think I was responding with the app so couldn't reference your post. Correct, I should have been talking about hte operating agreement. LLC's have Operating Agreements. Partnerships have Partnership Agreements. You have a multi-member LLC which is taxed like a partnership, but its still a LLC.

The Operating Agreement is extremely important. When you hear it having terms agreed in writing, this is where it should be in writing. A good lawyer will help draft an agreement that covers all the important contingencies and whatever are your concerns. So, it should/will be tailored to your needs and situation. Remember, since the LLC really only provides asset protection its important that you have your Operating Agreement, i.e. your legal framework for operating, in order to support the asset protection.

Good luck.

Good luck.

The operating agreement is not just for taxes. Taxes are a minor part of its purpose. It controls how you run things and what happens under various scenarios, especially when things do not go as planned. And they rarely go as planned.

If partnership agreements says you need to ask for reimbursements, generally, you can’t use UPE. 

If no income, UPE will just increase/generate your losses. 

@Naz Hossain

Your CPA did not explain to you what pass-through means? It is not an alternative to a partnership, it is a feature of the partnership.

Pass-through is a three-step process:

1. The partnership files a tax return reporting all shared income and shared expenses. For example: we made $100k from wholesale fees and spent $40k on marketing, technology, education etc. - resulting in a $60k net taxable income.
2. The partnership splits this result between the partners and sends each of them Form K-1 that basically says: you made $30k from this partnership (assuming 50/50 split).
3. Each partner adds his respective $30k to his personal income on his individual income tax return and pays taxes on his combined income from everything.

So, the calculations of profit/loss are done on the partnership level, but the resulting taxes are paid on the personal level. Hence the term pass-through.

Next, you suggested that your expenses could be higher than your partner's. Need to proceed carefully here. There're two types of expenses: business expenses of the partnership and business expenses of the individual partners. The difference is in whether the partnership as an entity agrees to pay for a particular expense from the business money that belongs to the partnership. 

Actually, we have 3 kinds, not 2 kinds of expenses. Personal expenses are divided into expenses that the partners are required to pay on their own, from their personal money, and expenses that the partners simply choose to pay on their own.

The 1st group, shared expenses, are deducted on the partnership tax return. The 2nd group, called unreimbursed partnership expenses, are deducted on the partners' individual tax returns. The 3rd group, let's call them elective expenses (there's no technical tax term for them), are not deductible at all.

As you can see, the distinction is important. It is regulated by your operating agreement. For example, it may require that the partners pay themselves for driving their personal vehicles for business purposes and for maintaining their home offices. The operating agreement must also say whether or not these expenses will be reimbursed by the partnership. So study your operating agreement and see if maybe it needs more work.

And I must say that, since you have a CPA and a lawyer on your team, it's their job to set all this up and explain it all to you. Otherwise, you should consider upgrading your advisors.

Do you even have a functional trade or business yet?  Has there been any material revenue?  It sounds like all of these expenses are start-up expenditures based on the OP.

Generally the best way for a partnership to handle expenses of this nature is an accountable plan, authorized by the operating agreement.  Your CPA should be able to advise on this matter.