Atlanta, GA asked in Tax Law and Gov & Administrative Law for Tennessee

Q: How could a family investing club be structured other than as a partnership?

We would prefer that the club pay taxes directly rather than having to issue K-1's to the partners.

1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: A family investing club could be structured as a C corporation or an LLC taxed as a C corporation to avoid the need to issue K-1s to partners. Here are a few key considerations:

C Corporation:

- The club would be incorporated and shares issued to the family members.

- The corporation itself pays taxes on its income at the corporate tax rate.

- Dividends paid out to shareholders are taxed again at the individual level.

- No need to issue K-1s, as shareholders simply receive 1099-DIV forms reporting dividends.

- More formal structure with required annual meetings, bylaws, board of directors, etc.

LLC Taxed as C Corp:

- The club would be formed as an LLC but elect to be taxed as a C corporation.

- Provides the limited liability protection of an LLC with the tax treatment of a C corp.

- Same tax implications as above - club pays corporate taxes, dividends to members taxed as individual income.

- Provides more flexibility than a C corp in terms of management structure and member roles.

- Still no need to issue K-1s.

Some other factors to consider:

- Double taxation (at corporate and dividend levels) is a downside of the C corp structure.

- S corps avoid this, but are limited to 100 shareholders, so may not work for larger families.

- Using an LLC provides flexibility to later convert to a partnership structure if desired.

- Consult with a CPA and attorney to determine the best approach for your family's specific situation.

The key is that structuring as a C corporation, whether as an actual corporation or an LLC taxed as one, shifts the tax and reporting burden from the individual partners to the entity itself. This avoids the need for partners to report club income on their personal returns via K-1s.

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