Do I have to file Partnership K-1 ?

vc6vc6 · Joined: 17 Jan 2008 Posts: 5

or can I continue using schedule C?

Here is my situation:

I established a single-member LLC in 2006.

In August 2007 I signed (as the duly authorized agent of the LLC) an
agreement with a foreign (i.e. non-US) startup: In exchange for my
professional services, I will receive 10% of the stocks of that
company. This is an addition for a certain monthly payment for my
services.

Currently, no profits (or any other income other than small
investments) have been generated by that other foreign (non-US)
company. Thus, the entire "ownership" of that other company is
somewhat theoretical (i.e. on paper - no income made yet).

My question is: should the stocks that my LLC currently owns (of that
other company) be treated as "capital" (as in "capital gain")? Or do I
have to file Partnership K-1?

I know that this calls for hiring a CPA but currently I haven't made
enough income and I have been able to manage by filing Schedule C all
by myself... If no partnership K-1 is required then I can continue in
that mode until livable income starts flowing in.

Should K-1 partnership be filed from the year that partnership was
conceived? Or only from the year that partnership resulted in any
income?

Thanks,
Victor

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Archived from group: misc>taxes>moderated

vc6vc6 · Joined: 17 Jan 2008 Posts: 5

On Jan 18, 7:36 pm, vc6vc6 wrote:
> or can I continue using schedule C?
>
> Here is my situation:
>
> I established a single-member LLC in 2006.
>
> In August 2007 I signed (as the duly authorized agent of the LLC) an
> agreement with a foreign (i.e. non-US) startup: In exchange for my
> professional services, I will receive 10% of the stocks of that
> company. This is an addition for a certain monthly payment for my
> services.
>
> Currently, no profits (or any other income other than small
> investments) have been generated by that other foreign (non-US)
> company. Thus, the entire "ownership" of that other company is
> somewhat theoretical (i.e. on paper - no income made yet).
>
> My question is: should the stocks that my LLC currently owns (of that
> other company) be treated as "capital" (as in "capital gain")? Or do I
> have to file Partnership K-1?
>
> I know that this calls for hiring a CPA but currently I haven't made
> enough income and I have been able to manage by filing Schedule C all
> by myself... If no partnership K-1 is required then I can continue in
> that mode until livable income starts flowing in.
>
> Should K-1 partnership be filed from the year that partnership was
> conceived? Or only from the year that partnership resulted in any
> income?
>
> Thanks,
> Victor
>

No one has an answer? Or have I asked the question incorrectly? If the
latter, please guide me so that I can provide additional information
that may be needed to answer my question - or at least give me a
direction in which I can further study the subject. Eventually I will
pay a CPA to give me an authorized answer, but due to insufficient
income this year, I am trying to learn as much as possible up front,
to minimize the amount the CPA will charge.

Thanks,
Victor

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Bill Brown · Joined: 25 Aug 2007 Posts: 104

On Jan 20, 8:46 pm, vc6vc6 wrote:
> On Jan 18, 7:36 pm, vc6vc6 wrote:
>
>
>
>
>
> > or can I continue using schedule C?
>
> > Here is my situation:
>
> > I established a single-member LLC in 2006.
>
> > In August 2007 I signed (as the duly authorized agent of the LLC) an
> > agreement with a foreign (i.e. non-US) startup: In exchange for my
> > professional services, I will receive 10% of the stocks of that
> > company. This is an addition for a certain monthly payment for my
> > services.
>
> > Currently, no profits (or any other income other than small
> > investments) have been generated by that other foreign (non-US)
> > company. Thus, the entire "ownership" of that other company is
> > somewhat theoretical (i.e. on paper - no income made yet).
>
> > My question is: should the stocks that my LLC currently owns (of that
> > other company) be treated as "capital" (as in "capital gain")? Or do I
> > have to file Partnership K-1?
>
> > I know that this calls for hiring a CPA but currently I haven't made
> > enough income and I have been able to manage by filing Schedule C all
> > by myself... If no partnership K-1 is required then I can continue in
> > that mode until livable income starts flowing in.
>
> > Should K-1 partnership be filed from the year that partnership was
> > conceived? Or only from the year that partnership resulted in any
> > income?
>
> > Thanks,
> > Victor
>
> No one has an answer? Or have I asked the question incorrectly? If the
> latter, please guide me so that I can provide additional information
> that may be needed to answer my question - or at least give me a
> direction in which I can further study the subject. Eventually I will
> pay a CPA to give me an authorized answer, but due to insufficient
> income this year, I am trying to learn as much as possible up front,
> to minimize the amount the CPA will charge.
>

Partnerships file Forms 1065 and the related Schedules K-1. A single
member LLC is not a partnership. It is disregarded for federal tax
purposes unless it elects to be taxed as a corporation.

The fair market value of the shares is reported as income on your
Schedule C. That income amount becomes your basis in the shares.

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Katie · Joined: 25 Aug 2007 Posts: 94

On Jan 20, 5:46 pm, vc6vc6 wrote:
> On Jan 18, 7:36 pm, vc6vc6 wrote:
>
>
>
>
>
> > or can I continue using schedule C?
>
> > Here is my situation:
>
> > I established a single-member LLC in 2006.
>
> > In August 2007 I signed (as the duly authorized agent of the LLC) an
> > agreement with a foreign (i.e. non-US) startup: In exchange for my
> > professional services, I will receive 10% of the stocks of that
> > company. This is an addition for a certain monthly payment for my
> > services.
>
> > Currently, no profits (or any other income other than small
> > investments) have been generated by that other foreign (non-US)
> > company. Thus, the entire "ownership" of that other company is
> > somewhat theoretical (i.e. on paper - no income made yet).
>
> > My question is: should the stocks that my LLC currently owns (of that
> > other company) be treated as "capital" (as in "capital gain")? Or do I
> > have to file Partnership K-1?
>
> > I know that this calls for hiring a CPA but currently I haven't made
> > enough income and I have been able to manage by filing Schedule C all
> > by myself... If no partnership K-1 is required then I can continue in
> > that mode until livable income starts flowing in.
>
> > Should K-1 partnership be filed from the year that partnership was
> > conceived? Or only from the year that partnership resulted in any
> > income?
>

Agreeing with Bill ... you have not formed a partnership with the
other company, as you have described the transaction. Your LLC has
agreed to perform services for the other company (your customer) and
accept shares in that company as part of your payment. The FMV of the
shares you received (at the time of receipt with no restriction on
your sale or other disposition of them, or if there are restrictions,
at the time those restrictions are removed or expire) is ordinary
income to you, reportable as gross receipts on your Schedule C. As
Bill says, that amount will be your basis in the shares for
calculating capital gain or loss when you dispose of them. If the
shares had no FMV when you received them, your income is zero and your
basis in them is zero.

The foregoing assumes that the "other company" is a corporation, or
would be a corporation under U.S. law. If the "other company" is a
flowthrough entity, analogous to a U.S. LLC, then you may have
flowthrough income from that entity and IT needs to issue YOU a K-1 or
the equivalent.

Katie in San Diego

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taxxcpa · Joined: 25 Aug 2007 Posts: 28

Katie wrote:
> On Jan 20, 5:46 pm, vc6vc6 wrote:
>> On Jan 18, 7:36 pm, vc6vc6 wrote:
>>
>>
>>
>>
>>
>>> or can I continue using schedule C?
>>> Here is my situation:
>>> I established a single-member LLC in 2006.
>>> In August 2007 I signed (as the duly authorized agent of the LLC) an
>>> agreement with a foreign (i.e. non-US) startup: In exchange for my
>>> professional services, I will receive 10% of the stocks of that
>>> company. This is an addition for a certain monthly payment for my
>>> services.
>>> Currently, no profits (or any other income other than small
>>> investments) have been generated by that other foreign (non-US)
>>> company. Thus, the entire "ownership" of that other company is
>>> somewhat theoretical (i.e. on paper - no income made yet).
>>> My question is: should the stocks that my LLC currently owns (of that
>>> other company) be treated as "capital" (as in "capital gain")? Or do I
>>> have to file Partnership K-1?
>>> I know that this calls for hiring a CPA but currently I haven't made
>>> enough income and I have been able to manage by filing Schedule C all
>>> by myself... If no partnership K-1 is required then I can continue in
>>> that mode until livable income starts flowing in.
>>> Should K-1 partnership be filed from the year that partnership was
>>> conceived? Or only from the year that partnership resulted in any
>>> income?
>
>
> Agreeing with Bill ... you have not formed a partnership with the
> other company, as you have described the transaction. Your LLC has
> agreed to perform services for the other company (your customer) and
> accept shares in that company as part of your payment. The FMV of the
> shares you received (at the time of receipt with no restriction on
> your sale or other disposition of them, or if there are restrictions,
> at the time those restrictions are removed or expire) is ordinary
> income to you, reportable as gross receipts on your Schedule C. As
> Bill says, that amount will be your basis in the shares for
> calculating capital gain or loss when you dispose of them. If the
> shares had no FMV when you received them, your income is zero and your
> basis in them is zero.
>
> The foregoing assumes that the "other company" is a corporation, or
> would be a corporation under U.S. law. If the "other company" is a
> flowthrough entity, analogous to a U.S. LLC, then you may have
> flowthrough income from that entity and IT needs to issue YOU a K-1 or
> the equivalent.
>
> Katie in San Diego
>
If you formed a single-member LLC you do not need to file a partnership
return or any K-1s. You can report your income and expenses on Schedule C.

A single-member LLC is a disregarded entity for tax purposes.

As others have advised, the value of the stock received would be income
if there are no restrictions at the time of receipt.

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vc6vc6 · Joined: 17 Jan 2008 Posts: 5

Thank you all for explaining to me this issue. I now understand that
K-1 is for partnerships formed legally here in the USA, so that
simplify things for me as I am currently only considered a shareholder
in that other company.

I now have a follow up question to further clarify an item in your
answer (see below):

On Feb 4, 4:26 pm, taxxcpa wrote:
> Katie wrote:
>
> > Agreeing with Bill ... you have not formed a partnership with the
> > other company, as you have described the transaction. Your LLC has
> > agreed to perform services for the other company (your customer) and
> > accept shares in that company as part of your payment. The FMV of the
> > shares you received (at the time of receipt with no restriction on
> > your sale or other disposition of them, or if there are restrictions,
> > at the time those restrictions are removed or expire) is ordinary
> > income to you, reportable as gross receipts on your Schedule C. As
> > Bill says, that amount will be your basis in the shares for
> > calculating capital gain or loss when you dispose of them. If the
> > shares had no FMV when you received them, your income is zero and
> > your basis in them is zero.

>
> As others have advised, the value of the stock received would be income
> if there are no restrictions at the time of receipt.
>

I hope that this doesn't mean that I have to pay tax on something that
I had no way to sell, nor generated any cash for me... That foreign
company is a software-based startup which has not generated any sales
(and thus no profits) whatsoever.

How does one determine FMV for stocks of a privately owned (foreign)
startup which so far managed to survive using small investments only?

Since from my bank account's point of view these stocks are worth
exactly ZERO right now (and at the time of receipt), is there a way to
defer taxes on these stocks to the time at which they are sold?

I know that by then (if these stocks ever become worth anything) I
will have to pay tax on the ENTIRE sale income, but at least I will
have /something/ from which I can pay...

Any advice?

Thanks,
Victor

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vc6vc6 · Joined: 17 Jan 2008 Posts: 5

>
> I hope that this doesn't mean that I have to pay tax on something that
> I had no way to sell, nor generated any cash for me... That foreign
> company is a software-based startup which has not generated any
> sales (and thus no profits) whatsoever.

Hmmm... I just contacted a CPA and it turns out that my fears come
true... I was shocked to discover that my situation is not special at
all and there is an entire section in IRS code called Section 83,
dedicated just to this issue:

http://tinyurl.com/2pnjmw

>
> How does one determine FMV for stocks of a privately owned (foreign)
> startup which so far managed to survive using small investments only?
>

The FAQ on section 83(b) states:

Fair market value for purposes of section 83(b) is determined in the
same manner as for other provisions of the Internal Revenue Code.
That is based upon all of the facts and circumstances. The person
making the 83(b) election must declare a value for the property at the
time of making the lection, but the IRS may later challenge or contest
this value. This is one of the risk of making an 83(b) - if the value
is challenged, the person may find themselves owing more tax than
planned. For this reason, it is prudent to either use objective
criteria to establish value. Methods often used include: (a)
comparable sales to others for cash on or about the time of the
transfer; (b) valuations determined by a qualified appraiser, or (c)
valuations based upon determinations by others (such as a venture
capitalist valueing a company for the purpose of making an
investment.

> Since from my bank account's point of view these stocks are worth
> exactly ZERO right now (and at the time of receipt), is there a way to
> defer taxes on these stocks to the time at which they are sold?
>

It seems that the answer is unequivocally NO.

> I know that by then (if these stocks ever become worth anything) I
> will have to pay tax on the ENTIRE sale income, but at least I will
> have /something/ from which I can pay...
>

Yup! This is a well known issue, described in the FAQ here:

http://tinyurl.com/38zha3

> Any advice?
>

Yes, the time has come to pay to a CPA...

Victor

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