Feb

7

LLC Partnership Taxes: 1065 and K-1

February 7, 2008 |

A Limited Liability Corporation (LLC) can be treated as an S-Corporation or as a Partnership by the Federal Government Internal Revenue Service (IRS) (you fill out form 8832 to classify it as Partnership). When I established my LLC I made it a Partnership: a very flexible arrangement that allows me to divide the earnings (or losses) among the LLC members without too many legal restrictions. The IRS, however, wants to know how the bounty was divided. In situations like mine you need to fill out two sets of forms:

  • 1065 - Essentially it is an income statement (what you earned and what you paid and distributed to members) and a balance sheet where you list your assets and balance them out with the liabilities. In our case it was fairly simple. The assets where a bunch of accounts receivables (what our member’s equity (what you expect to pay your members).  Liabilities where simple as well: what we owe our contractors, and the member’s equity (what we owe ourselves once we get paid).
  • K-1 - This is the W-2 equivalent.  We have to fill out one for every member.  It is where the self employment income will be reported to the IRS and what the LLC members will use to fill out their taxes.  Very simple document.  In our case, boxes 1 and 14 show what we earned.

Thats it.  Filling them out takes only a few hours.  Understanding the logic behind them may take longer, but that is usual with any IRS forms.  I do not think you have to spend money on software to fill these out for a small LLC like ours.

One good thing about filling these forms out is that they can be used to show customers your official income statement and balance sheet.  Keep a few copies of the 1065.  Although you do not have to file them publicly (like a publicly traded company does), stating that you have filed them with the IRS gives them a sense of validity.  After all, you wouldn’t lie to the IRS, would you?  (Most people wouldn’t lie to the IRS, it is just a few deadbeats that do).   If your financial situation is good it could be a plus when potential clients are deciding to hire you.  Other potential clients require copies of them on requests for proposals and similar situations.  Banks may require copies as well if trying to decide to give you credit.


Comments

1 Comment so far

  1. Taxes on February 7, 2008 7:10 am

    [...] unknown wrote an interesting post today onHere’s a quick excerptA Limited Liability Corporation (LLC) can be treated as an S-Corporation or as a Partnership by the Federal Government Internal Revenue Service (IRS) (you fill out form 8832 to classify it as Partnership). When I established my LLC I … [...]

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