We have a start-up company and over time have given out % of the company to people making various contributions of time/expertise. More recently, the company has started making money (not yet profitable), and a few people have contributed $ for a percentage of the LLC. We are getting ready to, again, allocate a small % of the company to an individual to recognize his time and efforts. Can someone explain to me how I need to think about this for tax purposes?=============?a sort of legal issue , I guess. Although the promise of providing services may be deemed consideration for the issuance of membership interests, typically the value of the services are not deemed capital contributions to the LLC unless the operating company agreement so provides. in general, an Multi Member
LLC, I mean 2+ member LLC, is treated as a partnership for income tax purposes and must be formed in a specific state like a partnership. However, legally, your MMLLC is not a reg. Partnership but it?s just treated this way for tax purposes. Many MMLLCs start out as partnerships, and this limited liability protection is a major benefit because partnerships do not receive this personal asset protection. There are no limits to the number of Members a MMLLC can have and the LLC Members can be individual people, or they can be companies like another reg. Corp or LLC. Members of either MMLLC or reg partnership are required to contribute capital to an MMLLC only in the amounts they agree to contribute in the Operating Agreement, at the times specified in the OA. In the first category, the LLC defaults to pass-through tax status.this means that the MMLLC again defaults to pass-through tax treatment. The MMLLC, must file an informational partnership tax return IRS Form 1065. This also results in an IRS Form K-1 for each member to report the tax profit or loss on each member?s 1040 tax return.
Does the individual getting the % need to recognize income equal to the valuation of the % based on the last cash contribution?======correct; as you said, for this type of taxation, the MMLLC will file Form 1065 ,Partnership tax Return form, with the IRS. This is an informational return. Also, whoever prepares the taxes for your MMLLC will also issue Sch K-1s to the MMLLC Members. The Sch K-1 then become a part of each Member?s personal 1040 personal income return. The Sch K-1 reports the income or loss that each Member made or lost from the MMLLC. In your MMLLC, in order to pay the members, you will simply take what are called capital distributions. This is a withdrawal made from the MMLLC Bank account to each MMLLC Member in proportion to their membership interest(how much they own.each Member makes a capital contribution to the MMLLC, also in proportion to their membership interest.