LLC question

[Catherine]

Hi all --

I have a new client with a messed-up situation. The business entity was a two-member LLC filing a 1065; one member (#2) walked out July '07. Remaining member (#1) filed for extension in mid-April. I got some (maybe most) of the information about two weeks ago.

Here are the issues/questions I'm pondering:

Member #2 leaving ended the partnership filing -- a short year 1065 should have been filed Nov 07. So that will be a late filing; no help for it now.

Balance of 2007 goes on remaining owner's Schedule C for 2007.

But -- the remaining member (#1) has been on payroll since Jan 07. In addition, he's taking taking some distributions. I found references on how a member may be considered an LLC employee, restrictions on benefits, etc. However, the Form 1065 line 9 for wages specifically states "other than to partners". Do I disregard this caution in this instance? Or, if they must be reported elsewhere -- then where?

Anything else people can warn me to check for?

Thanks.

Catherine

[RoyDaleOne]

If the salaries are to a partner in the partner's capacity as an employee and not as parrtner, why would you place the deduction on the partner's line?

[michaelmars]

i'd file a 1065 for the entire year, allocating the income properly of course for the period each was an active member then switch to a sch c for 2008. no difference in taxes due, no red flag since there will be 2 k-1's either and just because the partner "walked out" was there a legal dissolution of the partnership? Bet you have an argument that the there was hope till 12/31 that the partner would return and continue in his capacity as a partner. If he showed up now he might even still have a claim on his share of the partnership unless he "legally" "walked out". I'd discuss this option with your client and how its a good argument for filing the 1065 and avoiding penalties.