Do you operate your business as a partnership or as an LLC that’s treated as a partnership for federal income tax purposes?

Are you compensating yourself and your fellow partners or LLC members with so-called guaranteed payments?

This article explains why you should consider paying preferred returns instead of guaranteed payments.

The first thing to know is that the federal income tax rules for LLCs treated as partnerships for tax purposes and their individual members are the same as the rules for partnerships and their individual partners. So, throughout this article, we will refer to partnerships and partners with the understanding that the same tax implications apply to LLCs treated as partnerships and their members.

Also, throughout this article, partners and LLC members are assumed to be individual taxpayers.

With those thoughts in mind, let’s first cover some necessary background information. Here goes.

What Is a Guaranteed Payment?

A guaranteed payment is a payment by a partnership to a partner that’s determined without regard to the partnership’s net income.

Guaranteed payments can be for services rendered by a partner to the partnership ... Log in to view full article.