u/AdFormer5311

TL;DR:
- Startup bought me out for $10.5k saying my total ownership was 1.26%.
- Told the IRS my I actually received ~$51k of taxable equity compensation and owned ~20% of the company’s capital.
- Now I owe more than I was bought out for.

I did work for a startup in 2024. LLC taxed as a partnership.

We initially agreed on a limited amount for free work in exchange for a small amount of equity.

Once we landed a customer and more work was needed, I agreed to do work for half pay, half equity.
- My usual rate is $200/hr so we agreed on $100/hr in cash and a certain % of equity for every hour.
- (I think this is one of several points where I shot myself in the foot...)

I was paid monthly via Gusto as a contractor.
- This was incorrect at the time, but I didn't know it (clearly they didn't either).
- I can't be a contractor if I'm a partner.
- This will bite me later.

So in Jan 2025 I get my 1099 from Gusto and file my taxes.
- (I do not receive a K1 - just a 1099)
- Didn't know to question it.

In April 2025 they offer to buy me out.
- They send me an offer that says I have accrued a total of 1.26% ownership.
- They explain based on current opportunity, income, etc. that they think $10,500 is a fair offer.
- I accept, happy for the small windfall, especially since paid work from them has dried up at this point.
- Interesting note: the buy out agreement has this line:

"WHEREAS, according to the Rider to the Operating Agreement, [MyName] has been granted 1.26% membership interest in the Company, which represents [MyName]’s total interest;"

- That percent was what I also believe was correct at the time.

In May, June, Sept I received $3,500 payments totaling the full $10,500.
- (Also received through Gusto... which again I should have known was a red flag but didn't...)

In Sept of 2025 I get a note from the CEO that basically says "oops we shouldn't have paid you as a contractor, you'll get an amended 1099 and K1 showing we paid you as guaranteed payments to a partner".

Okay. I'm a little bummed with a dim sense that guaranteed payments will be slightly worse for my taxes, but oh well, sounds like that's the right thing to do.

The amended ($0) 1099 shows up. All good. I wait for the K1.

The K1 shows up and now I'm in a tough spot.

They show all the money I was paid originally through gusto ($23,596) as guaranteed payments.

But they also show that I was paid an additional $51,250 in guaranteed payments, which is then listed as "capital contributed during the year".

They show a loss in my capital account of $3,854.

For an Ending capital account of $47,396.

On line J, they show my share of profit and loss going from 1% to 1.26% (which is what I expected) but show my share of Capital going from 1% to 20.7%!

And since I show $78,700 of guaranteed payment income instead of $23,596 of 1099 income, amending my 2024 taxes (which I still haven't done while I figure all this out) means I'll owe an extra ~$14k in taxes!

Now... I have since learned this is a pretty normal way of representing "sweat equity". I was given something of value and need to pay taxes on it.

But it also seems wrong that they came to me in April saying:

"You're total ownership is 1.26% and we believe a fair value for that is $10,500."

Then came to me 5 months later and said "by the way, we told the IRS that your total ownership was 1.26% of profit and loss, and 20% of capital, and that a fair value for it was $51,250"

That. Is. Bonkers.

So... is this just a case of "sorry, they were incompetent but you should've done your own research, enjoy your taxes".

Or can I make any argument they either misrepresented the transactions to me or misrepresented them to the IRS and are obligated to fix something here?

I mean... I agreed to do work for equity. We used a theoretical rate to decide how much. I signed a buyout agreement. So... maybe I'm just stuck holding the bag. 🤷 (Although I can't decipher how any rate we agreed on leads to their amount for the K1...)

OH! But one more even more confusing item... The latest K1 (after I emailed to say "guys, I don't think I should have gotten a 1099 for the buyout payments...) shows that $10,500 as a distribution and, well, someone explain this:

They attached a "partner's Basis Worksheet" that shows:
- Beginning of Year: 47,396
- Ordinary Business Income: 264
- Transfer of Capital: -37,134
- Distributions: 10,500
- Nondeductible Expenses: 26
- End of Year 0

So... They are still showing this as if I had 47,396 imaginary dollars in there, I got 10,500 of them, and the other 37k just... transferred to... where?

But the weirdest part is line J again:
- Share of Capital shows Beginning 20% and Ending 0%
- Share of profit and loss shows Beginning 1.26% and Ending 1.26%!

So... the buyout agreement says 1.26 was my entire ownership and that's what they were buying.

And this k1 shows that they bought my 20% capital ownership and I still own 1.26% of profit and loss!?

...make it make sense.