Paying Members of a Partnership LLC in WA State

Discussion in 'Starting a Business' started by paprikakitty, Oct 7, 2010.

  1. paprikakitty

    paprikakitty
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    For a partnership LLC. I was told that each partner should take their draws in the form of a written check for documentation purposes. One member insists on taking cash withdrawals & transfers from the business to his personal account. Is this okay?
     
  2. Fergal

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    Welcome to Business Advice Forum paprikakitty. What country or state is the business based in?

    Putting all transactions through the business bank account is a great way to keep a record of everything. It is a very helpful way to do things, should you need to look back to check and confirm previous withdrawals and transactions. Why would the other person insist on taking cash? Dealing with cash in this way entails the risk that some transactions are not recorded due to human error, or even worse an attempt at fraud.
     
  3. ArcSine

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    PK, taking draws in cash isn't illegal, but it's far from ideal, for the reasons Fergal named. At best, it probably generates administrative difficulties and/or accounting headaches. Worse, the likelihood of the problems Fergal mentioned are magnified.

    As a side note, this arrangement will have exactly zero effect on the partner's tax liability --- just in case that happens to be his motivation.
     
  4. paprikakitty

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    I am doing the bookkeeping for the partners. They are general contractors in Washington State. However, my main concern is protecting the partners should something happen to the LLC-lawsuits, bankruptcy, etc. I was told that it was necessary to keep the personal transaction with the business account to a minum to keep 'distance' between the partners and the entity so the entity would be liable if something were to happen. I would like to know the safest for them to take their earnings from the company so they do not have to worry about their personal assets should something happen. Is that even something I should be concerned about?

    (The partner dealing with the cash is doing it out of laziness as far as I can tell.)
     
  5. ArcSine

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    Thanks for the clarification, PK...it threw a better light on the question.

    The particular form of the draw doesn't create the concern you've mentioned. What you've heard is indeed spot on---you do want to maintain a clean separation between the partnership's transactions and affairs, and those of the partners as individuals. A breakdown of that separation dials up the odds that a lawsuit or other liability might be successful in "looking through" the partnership and going after the partners' personal assets.

    However, the mere taking of draws is not what's meant by a "co-mingling" or mixing of partnership and partner transactions, that gives rise to the aforementioned danger. Every partnership (well, those with positive cash flow, anyway) distributes profits periodically to the owners as draws. That's just routine stuff for every partnership. And further, the particular form of the draw doesn't change that basic premise---99.9% of the time the 'form' is a check, but if some partner prefers cash, wire transfer, or some other form, well, it's still just a draw.

    The kinds of transactions that create the concern you're asking about are (e.g.) the partnership paying the partners' personal bills; a partner carrying the partnership credit card around and paying for personal items with it; etc.

    However, it's still very important that all draws, regardless of their physical form, are booked as draws in the accounting system.
     
  6. paprikakitty

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    Thank you everyone for your help!!
     
  7. James00

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    The particular form of the draw doesn't create the concern you've mentioned. What you've heard is indeed spot on---you do want to maintain a clean separation between the partnership's transactions and affairs, and those of the partners as individuals. A breakdown of that separation dials up the odds that a lawsuit or other liability might be successful in "looking through" the partnership and going after the partners' personal assets.
     
  8. ArcSine

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    Thanks, Jimmy boy, for a glimpse into the mindset of the folks who run the website you're hawking....and it's none too flattering. More of a "stay away" warning, actually...
     

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