Adding member to LLC retroactively

[jfoxcpacfp]

Rambo wrote:

If I am not mistaken, my income for the year would be $250K plus $27K = $277K and spouse income would be $20K plus $243K = $263K.  We can then each do about ~20% profit sharing from the above.

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I was just trying to point out that you can contribute only 20% of the first $270k of profits (270 * .2 = 54). In this example, you are above the $270k limit and your spouse is below. If the partnership agreement is written such that it allocates the extra $7k to your spouse, you would each optimize 401k contributions.

[Rambo]

jfoxcpacfp wrote:

Rambo wrote:

Spouse is maxing SS so that is good for now. Would splitting income as above have any bearing on how we contribute to solo 401k?    Just want to make sure not missing anything that I overlooked. 

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It would if one of you ends up with >$270k of earned income and the other reports <$270k earned income. Actually, per your above example as you are making $275k. That extra $5k should go to your spouse. Partnership agreement can have wording to that effect.

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Not sure I clearly understand what you mean.

 

My objective is to capture solo 401k contribution profit sharing component over the ~$280K income. First half of the year, we each have 1099 income with the spouse income about $20K and my income about $250K.  The second half of the year I project about the same or $270K combined.  Once the partnership established, I can allocated 90% of second half year income or approx $243 to spouse and 10% or $27K to me.

 

If I am not mistaken, my income for the year would be $250K plus $27K = $277K and spouse income would be $20K plus $243K = $263K.  We can then each do about ~20% profit sharing from the above.

 

Correct?

[jfoxcpacfp]

Rambo wrote:

Spouse is maxing SS so that is good for now. Would splitting income as above have any bearing on how we contribute to solo 401k?    Just want to make sure not missing anything that I overlooked.

Click to expand...

It would if one of you ends up with >$270k of earned income and the other reports <$270k earned income. Actually, per your above example as you are making $275k. That extra $5k should go to your spouse. Partnership agreement can have wording to that effect.

[Rambo]

jfoxcpacfp wrote:

Rambo wrote:

jfoxcpacfp wrote:

Rambo wrote:

Can one retroactively add member to LLC?

I currently have a single member LLC.  If I add spouse now, can I split all of the income we have had prior to her being added as a member/owner 50/50 i.e. income from January until now?

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Well, ahem, it depends on what your Articles of Organization say. Those details can be very easy to overlook.

The White Coat Investor wrote:

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It’s all fungible, right?

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Unless @rambo is planning to put the spouse on payroll, this would not solve the problem as all profits from the LLC flow through to the owner(s), whether or not distributed (as guaranteed payments or otherwise).

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Articles of organization ah of course – they say I of course can, but the monies prior were paid to me and spouse as sole proprietors – not sure I can now just change that over to partnership income.

 

What WCI recommends seems reasonable.  Let’s assume our projected income 1099 is 500K. I make 200K Jan-June 1099 and spouse made 50K 1099 sole prop income in the same period.  For the second half of the year (assuming partnership will bring in another 250K), I can elect spouse to get 90% profit from the combined partnership income, so now spouse gets 225K allocated pus the initial 50K as sole prop so total 275K for spouse and 275K for me.  This would allow for optimal contributions into a solo 401k.

For year 2018, we can just go 50/50.

Correct?

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Yes, you can do that. One of the beauties of partnerships is their incredible flexibility. The disadvantage of bringing your spouse on as a partner is that, if spouse is not already maxing out SS in another job, spouse will have to pay SS on the firs $127,200 of earnings. You need to weigh that against the benefit of contributing to a 2nd SOLO-k account if that is your reason for adding spouse as a partner.

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Spouse is maxing SS so that is good for now.

 

Would splitting income as above have any bearing on how we contribute to solo 401k?    Just want to make sure not missing anything that I overlooked.

[jfoxcpacfp]

Rambo wrote:

jfoxcpacfp wrote:

Rambo wrote:

Can one retroactively add member to LLC?

I currently have a single member LLC.  If I add spouse now, can I split all of the income we have had prior to her being added as a member/owner 50/50 i.e. income from January until now?

Click to expand…

Well, ahem, it depends on what your Articles of Organization say. Those details can be very easy to overlook.

The White Coat Investor wrote:

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It’s all fungible, right?

Click to expand…

Unless @rambo is planning to put the spouse on payroll, this would not solve the problem as all profits from the LLC flow through to the owner(s), whether or not distributed (as guaranteed payments or otherwise).

Click to expand…

Articles of organization ah of course – they say I of course can, but the monies prior were paid to me and spouse as sole proprietors – not sure I can now just change that over to partnership income.

 

What WCI recommends seems reasonable.  Let’s assume our projected income 1099 is 500K. I make 200K Jan-June 1099 and spouse made 50K 1099 sole prop income in the same period.  For the second half of the year (assuming partnership will bring in another 250K), I can elect spouse to get 90% profit from the combined partnership income, so now spouse gets 225K allocated pus the initial 50K as sole prop so total 275K for spouse and 275K for me.  This would allow for optimal contributions into a solo 401k.

For year 2018, we can just go 50/50.

Correct?

Click to expand...

Yes, you can do that. One of the beauties of partnerships is their incredible flexibility. The disadvantage of bringing your spouse on as a partner is that, if spouse is not already maxing out SS in another job, spouse will have to pay SS on the firs $127,200 of earnings. You need to weigh that against the benefit of contributing to a 2nd SOLO-k account if that is your reason for adding spouse as a partner.

[Rambo]

The White Coat Investor wrote:

This is one reason I only change my business structure on Jan 1. Less hassle.

I’m not sure if my solution solves Rambo’s problem or not as he hasn’t exactly explained the problem. But you can certainly change your % of ownership and thus your % of distributions to something other than 50/50 and you can do it multiple times, but probably only once per tax year.

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Would have been much easier if I did all this Jan 1 agreed.

 

I guess the problem would be inability to full capture solo 401k profit sharing contributions.  Right now, spouse and I both have 1099 incomes.  We are both sole proprietors. My 1099 is about 400K and hers is about 100K.  Without a partnership, I can capture the full 54k, but she can only do 20K  (total 74K) profit sharing solo 401k contribution.  If we form a partnership, we can capture approximately 100K contributions split between us (0.2 x 500,000)

 

What you suggest will allow this capture, as per calculations in my prior post.  I am just not sure if this is allowable or how to do it as I have never done a partnership 1065 return.  I looked quickly and it seems to pertain to section J, where I can put both of our names and spouse 90% and me 10%

[The White Coat Investor]

This is one reason I only change my business structure on Jan 1. Less hassle.

I'm not sure if my solution solves Rambo's problem or not as he hasn't exactly explained the problem. But you can certainly change your % of ownership and thus your % of distributions to something other than 50/50 and you can do it multiple times, but probably only once per tax year.

[Rambo]

jfoxcpacfp wrote:

Rambo wrote:

Can one retroactively add member to LLC?

I currently have a single member LLC.  If I add spouse now, can I split all of the income we have had prior to her being added as a member/owner 50/50 i.e. income from January until now?

Click to expand…

Well, ahem, it depends on what your Articles of Organization say. Those details can be very easy to overlook.

The White Coat Investor wrote:

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It’s all fungible, right?

Click to expand…

Unless @rambo is planning to put the spouse on payroll, this would not solve the problem as all profits from the LLC flow through to the owner(s), whether or not distributed (as guaranteed payments or otherwise).

Click to expand...

Articles of organization ah of course - they say I of course can, but the monies prior were paid to me and spouse as sole proprietors - not sure I can now just change that over to partnership income.

 

What WCI recommends seems reasonable.  Let's assume our projected income 1099 is 500K. I make 200K Jan-June 1099 and spouse made 50K 1099 sole prop income in the same period.  For the second half of the year (assuming partnership will bring in another 250K), I can elect spouse to get 90% profit from the combined partnership income, so now spouse gets 225K allocated pus the initial 50K as sole prop so total 275K for spouse and 275K for me.  This would allow for optimal contributions into a solo 401k.

For year 2018, we can just go 50/50.

Correct?

[Rambo]

The White Coat Investor wrote:

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It’s all fungible, right?

Click to expand...

That was my alternative.

 

Since this is the first time I will be doing a partnership return (and mid-year), I think I will be allocate % profit on Form 1065 Section J:

J Partner’s share of profit, loss, and capital (see instructions):
Beginning                                         End

 

Since this form is not due until March of 2018, I can wait until all of the monies under the partnership are available, divide them up to capture max solo 401k for me and spouse, calculate percentage and then fill in Section J.

 

Correct?

[jfoxcpacfp]

Rambo wrote:

Can one retroactively add member to LLC?

I currently have a single member LLC.  If I add spouse now, can I split all of the income we have had prior to her being added as a member/owner 50/50 i.e. income from January until now?

Click to expand...

Well, ahem, it depends on what your Articles of Organization say. Those details can be very easy to overlook.

The White Coat Investor wrote:

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It’s all fungible, right?

Click to expand...

Unless @Rambo is planning to put the spouse on payroll, this would not solve the problem as all profits from the LLC flow through to the owner(s), whether or not distributed (as guaranteed payments or otherwise).

[Craigy]

Good question for your CPA.

[The White Coat Investor]

Probably not, but you could pay yourself less for the rest of the year to make up for it, then change the percentages for 2018. It's all fungible, right?

[Rambo]

Can one retroactively add member to LLC?

 

I currently have a single member LLC.  If I add spouse now, can I split all of the income we have had prior to her being added as a member/owner 50/50 i.e. income from January until now?