INCOME TAXES - HOW DO THEY FLOW

by a searcher from University of Pennsylvania - The Wharton School

11 months ago

To the accountants or others with experience...

When you have a preferred / common structure in a self-funded deal, how do income taxes work prior to the pref being distributed back to investors - assume LLC. 

Do pref investors pay 100% of income taxes on K1 assuming that there is still pref outstanding?

If you have a year where you paid back all pref and then start to distribute to common, are income taxes then paid based on ratio of pref to common?

Happy to chat for 10 minutes as well if unclear.
Thank you and Happy New Year!
Jason

2 likes
98 views
2 comments

investor from Western Washington University

Proportionate to total units outstanding (i.e. common equity ownership)

11 months ago | like reply | 0 likes

intermediary from The University of Chicago - Booth School of Business

The business should make distribution to cover K1 taxes for all investors. I'm currently working with one where the investment documents spell out that company will.pay 33 1/3% of K1 income to cover taxes.

11 months ago | like reply | 0 likes

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Family office looking for traditional searchers

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Downsides of "buying a job" below 750k+ EBITDA?

6-7x for a Self-funded Search Deal?

Examples of self-funded searcher websites

Self Funded Acquisition: A few Things I Learned

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.