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% Ownership: Conflict between K-1 and Operating Agreement

Your question:

When would the % capital ownership on a partnership/LLC k-1 be different than the agreed upon amount in their operating agreement?

Linda says:

You have two choices. Choice # 1: The tax return was prepared incorrectly. Sad, but true that not every preparer gets it right every time.

Unmodified Operating Agreement

This is Choice # 2 and would be my first guess. The Operating Agreement was not modified for a % change. One partner contributed more capital or bought up part of the other partner’s share.

One scenario:

In a partnership with a lot of partners, one died and left his interest to his son, who was also a partner. The two interests were combined, so the father was gone, but the son had more. The Operating Agreement (or in this case Partnership Agreement) was not changed, but there were minutes in the company that reflected the change.

I recommend you ask for updated paperwork and find out the details.

Don’t assume…

It is hard to get the balance right. If you assume the tax return is correct, you can spend a lot of time trying to figure out why it is not what you expected. If you don’t count on the return being correct…well…why do we rely on tax returns so much?

When the tax return outright conflicts with other documentation, and a site-wide search at www.LindaKeithCPA.com for a targeted explanation does not clear it up, ask the borrower for an explanation.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.