LLCs paying other LLCs

[Bri]

I don't know what to make of this.  Client set up an LLC for himself.

He's also a partner in a larger company.  That LLC issued him a K-1 for his income, and then also issued his own separate (single member) LLC a K-1 as well for a separate source of income from the larger partnership.  It's that "smaller" LLC that sponsors his plans.

The first year, he had a Schedule C to reflect the payments from the smaller LLC to the individual.

Since then (the past 2-3 years), the income is not being shown as flowing through the smaller LLC - he just received it on a second K-1 issued by the larger company.  So I think that's wrong to use for purposes of funding his plans.

But - is it enough for the big LLC to pay the little LLC on that K-1, or does the little LLC then need to turn around and issue a Schedule C every year?  Or, is it enough that as the single member, the earnings on the K-1 (from big LLC paid to little LLC) enough to count as income for the individual himself?

We're trying to figure out if the CPA needs to re-address past years' tax statements, in terms of how the payments were reported, before we get into tracking what sort of benefit he's actually due under the DB plan.

thanks in advance....

--bri

 

[Bird]

2 hours ago, Bri said:

Since then (the past 2-3 years), the income is not being shown as flowing through the smaller LLC - he just received it on a second K-1 issued by the larger company.  So I think that's wrong to use for purposes of funding his plans.

I started to say I agree but...no, or at least I don't think so.  Forget where the money is coming from for a moment, he has an LLC with income.  An LLC can certainly sponsor a plan.  (If the individual was a partner receiving a K-1, then he could not sponsor a plan on his own.)  Caveats:  you need to make sure the sponsor is the small LLC, or the sole prop, or maybe both in order to use income for all years.  Also the relationship with the big LLC and dual K-1s at least raises some questions about possible control group or affiliated service group issues which should be considered, if they haven't been already.

[Bri]

Definitely not a CG - he's a smaller than 50% partner in the "big" LLC.  I don't think the industry qualifies as an FSO, either, for affiliated service group consideration, too.

The "side" (small) LLC is definitely the plan sponsor. 

Basically we're trying to figure out if the lack of a tax form from the small LLC to the sole proprietor, is enough to substantiate a salary of $0 (to keep DB funding low), or if the small LLC's K-1 received from the big LLC, is enough to state that there's income to the actual individual.

[C. B. Zeller]

A single-member LLC (or sole proprietorship) doesn't "issue" a schedule C, the schedule C is part of the member's (or sole proprietor's) 1040. So if this person had income from their company, and didn't file a schedule C, how are they reporting their income for tax purposes?

[Luke Bailey]

I don't think the facts are sufficiently explained to say anything definitive, but (a) a single member LLC is disregarded for federal income tax purposes, which would explain why the larger LLC stopped issuing a K-1 to the single member LLC, and (b) have you run this through an affiliated service group analysis, e.g. IRC sec. 414(m)(2)(A)?