RESTAURATEURS AND INVESTORS K-1 MISTAKES AND WARNINGS by Jeff Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC

Dear restaurateur client:  Most restaurant investments offer A and B shares. A shares are issued to investors who put the capital into the LLC Partnership.  B Shares are paid for the expertise of the restaurateurs and his or her management team as a motivational tool.

 

Once A Share investors get their money back, B share investors begin to share in the distributions and profits.   I hope this document becomes our KEY document to explain how loss and FICA tip credit should be allocated when investors receive distributions, profit and loss and FICA tip credit.  This explanation should work for ALL of the LLCs.

 

Explanation:

 

1. Percentage of profit/loss and FICA Tip Credit allocated is based on capital contributed.

2. Once ALL of the (A shares) capital contributed is paid back (without interest), the allocation is changed to being based on ownership percentage (B shares become vested and B shares get their prorata percentage of profit or loss and FICA tip credit).

3. Example

A.  John puts in $100K for 40% ownership and Bill put in zero dollars for the balance of the 100% ownership (once John is paid the $100K in full).

B.   Bill is the idea man. Bill manages the restaurants.

C.   For the 1st year there is a loss of $80K and  no cash is distributed.  John gets the entire loss.

D.   For the 2nd year, there is a profit of $30K and total distributions of $40K.  John receives the entire $30K profit and $40K distribution.

E.   For the 3rd year, there is a profit of $400K and total distributions of $300K.  John gets 100% of the profit and distributions until his $100K has been paid back (once he receives $60K)

F.  Once that critical event occurs, John begins receiving ONLY 40% of the distributions, 40% of the profit (loss in loss years) and 40% of the FICA TIP Credit.

G.   In year 4, John sells 10% and retains  30% of his ownership interest.

H.  Sally buys his interest for $80K.  Does Sally receive a priority distribution because of her $80K. NO!!

I.  If someone buys someone’s interest, they inherit the current status of the person they purchased from.  In the above example,  Sally will get 10% of the profit or loss and tip credit.

For comments, please email me at jeff@jbrookswa.com 

Thank you! Jeff Brooks

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com