Partnership/Multimember LLC - ENGAGE CPAs

A partnership can be organized as a general partnership, between two or more individuals, or as a multi-member LLC, meaning that each partner owns a portion of the LLC. A general partnership provides no protection from liability and seizure of personal assets can occur. Think of it as a DBA or sole prop, but one that is owned by two or more people. The partnership can still get an EIN from the IRS and operate as a business just like any other but without the extra LLC protection.
Similar to a single-member LLC, if used properly, a multi-member LLC provides separation between personal and business assets for liability purposes.
Every year a partnership must file Form 1065 showing the income and expenses of the business. Within Form 1065 is a K-1 for each partner that shows their portion of the profit and loss for that year. That K-1 is then input on their individual tax return (Form 1040), as all tax on profits from a partnership is subject to personal income taxes, which are ordinary income taxes and in most cases, self-employed tax rates as well.
Owners of partnerships are not allowed to take payroll via W2. Owners may withdraw funds from the business as an owner distribution, which reduces their equity in the business. But tax is paid on income earned during the year, not on the amount of distributions taken.
The major difference in how owners in a partnership can pay themselves comes from what is called a Guaranteed Payment. A Guaranteed Payment allows for owners to be compensated for services provided to the partnership above and beyond what is determined to be required based on ownership percentage. Partnerships are allowed to pay an owner, separate from his owner distribution, for his work in the business. These payments are an expense for the business, just like rent or office supplies, or advertising. So the payments reduce the overall income of the business. All partners should agree on, and put in writing, the methodology for determining the Guaranteed Payment amounts.
If you're a Multi-Member LLC remember to open a separate business bank account using the LLC name and EIN assigned by the IRS. If you're doing that, good job. This is VERY important in maintaining the separation of business and personal assets. Remember these four things:
DO NOT pay for personal expenses directly from the business.
DO NOT pay yourself via W2 payroll.
DO NOT use your business bank account as if it was a personal bank account.
PROTECT YOUR LLC