Is a limited partnership better than a Joint Venture?
Answer:
Well, it's like comparing apples and oranges—or maybe more like comparing a well-choreographed ballet to a spontaneous flash mob. Both have their own unique charm and quirks, and which one is "better" really depends on what kind of dance you want to do.
A limited partnership (LP) is like a well-rehearsed ballet. It's got structure, with general partners doing the heavy lifting and limited partners providing the financial backing. The general partners take on the liability, while the limited partners get to sit back and enjoy the show—or in this case, the profits.
On the other hand, a joint venture (JV) is more like a spontaneous flash mob. It's a temporary arrangement, often for a specific project or goal. It's a bit more flexible and less formal than an LP, but it can still get the job done.
So, which one is better? That's like asking if you'd rather watch Swan Lake or join a flash mob. It really depends on what you're looking for. If you want a long-term commitment with clearly defined roles, an LP might be the way to go. But if you're just looking to have some fun and make a quick buck, a JV might be more your style.
RLE, as General Partner, will hypothecate the properties as its contribution to the project, Limited Partner will then fund the LP bank account with their cash contribution. General Partner manages the LP bank account with a CPA that must follow the operating agreement of the LLC.
LLC operating agreement defines the terms of the partnership including the distributions of 100% of all profit to repay the investors capital contribution prior to the 50/50 distributions.
Each year, the California LLC pays the $800 annual fee and issues two K-1 (Form 1065) for the two members in the partnership.
K-1s are tax forms that are used for business partnerships to report to the IRS a partner’s income, losses, capital gain, dividends, etc., from the partnership for the tax year. With the K-1, a partner’s earnings can be taxed at an individual tax rate versus the corporate tax rate.
All pass-through entities, including partnerships, LLCs, and S Corporations must issue K-1s to individual partners and shareholders. The deadline to issue K-1s is March 15th, however, if an extension is filed by the partnership, LLC, or S Corporation, the due date may be extended to September 15th.
As outlined by the IRS, limited partners do not pay self-employment tax on their distributive share of partnership income, but they do pay self-employment tax on guaranteed payments.
General partners, however, are subject to self-employment tax on their distributive shares of income.
In general, a K-1 can affect personal taxes in two ways: either by increasing a partner’s tax liability or by providing them with a tax deduction.
It will likely increase their total tax liability for the year if the K-1 is associated with an income.
On the other hand, if the K-1 represents a loss or expenditure (for example, they are investing in a partnership) then it may result in a tax deduction for the partner and reduce their overall tax liability for the year.
To further illustrate, consider the following example: a partnership records a loss of $40,000 each year for the first two years of operations. In the third year, it made a profit of $200,000. Therefore, the partnership makes no tax payments on the first two years of losses. For the third year, which is a positive year, the partnership is taxed on $120,000 [$200,000 – ($40,000 x 2)]. The earnings amount is then split between the partners and taxed at their individual income tax brackets.
If a partnership records a loss over the tax year, partners can state the loss on the K-1 and carry the amount forward until a year of profit for a future tax deduction. Furthermore, consecutive years of net losses can accumulate and be used to apply against future income.
