Discussion:Partnership Allocation of Profits

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Discussion Forum Index --> Tax Questions --> Partnership Allocation of Profits

Chase (talk|edits) said:

15 May 2007
Client just sent over a revision to the Operating Agreement which states that 1/3 of the profits will remain as a Company reserve and may not be withdrawn. At the end of the day, from a tax perspective, 100% of the profit or loss is passed through, whether it is withdrawn or not. Have you seen this language in an LLC Operating Agreement? If so, do I need to take any action differently than what I have been taking, that is to flow it all through?

Jdugancpa (talk|edits) said:

15 May 2007
100% of profits pass through on K1. Doesn't matter if the agreement states 100% of profits will remain in LLC Members/Partners pay taxes, not LLC/partnership.

Chase (talk|edits) said:

15 May 2007
That's what I thought. I have not seen that clause before though so it threw me off. Thank you.

Mascpa (talk|edits) said:

15 May 2007
I went through this discussion with a client this season also. Clients often think they are taxed on profits TAKEN from a company as opposed to profits EARNED by company whether the profits are distributed or not.My client had a similar agreement to what you described and it took some explaining on my part for him to understand why he was going to be taxed on more profit than he received in cash.

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