We have a Partner LLC with two members. I have been informed that members do not receive paychecks. Instead, they receive guaranteed payments, which I believe are considered an expense to the company.If that is the case, should member payments then be applied to an expense account versus a member draw equity account?
A brief explanation of the differences between a draw and a guaranteed payment would be in order:
A 'draw' is a withdrawal of earnings. A member or partner usually will not take a draw unless there are earnings.
A guaranteed payment' is money that a member or partner takes out of the business REGARDLESS of whether there is a profit or not.
For that reason, a guaranteed payment is reported on page one of Form 1065 as an expense, and the expense reduces the income of the partnership potentially to a negative or a loss. The guaranteed payment then goes on the recipients K-1 as income specifically to that member or partner.
Guaranteed payments may be unequal, they do not have to be in proportion to a member or partners interest in the business. Draws on the other hand must (or really ought to) be pro-rata to a member or partners interest in the business.
To answer your question, then, if the payments are guaranteed payments, then they should definitely go to an expense account.
If they payments instead are draws, then they should to go a member draw equity account.
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Scott
Yep two years later your post helped me with my question.
I was doing a search in google and this post came up.
Wow thank you google and thanks Scott for the info.
Kim
