I would like to gain insights to advise a client on whether his business associates should receive K-1s or 1099s and the necessity of partnership agreements.
The client's financial information references investors which include him and his wife and two other third-party investors. The investors are shown as having contributions and distributions which are shown as expenses to arrive at the partnership net income. The contributions are immediately turned into inventory. The client stated that he and his wife are active and the third party investors just receive distributions on their income which is based on a percentage of gross sales. The third party investors are dependent on my client for guidance to run their business and have no other purchases. My assumption was that he and his wife are general partners and the other partners are limited partners and he should have an attorney draft a partnership agreement accordingly.
The corporate attorney does his diligence and discovers investment agreements which show the other (limited partners?) are actually distributors. They also receive distributions based solely on their inventory purchases. The attorney concludes that from a corporate law perspective, the other members? do not need to be considered limited partners, but says he is not advising on tax law.
Can I just defer to whatever the corporate attorney writes up in the partnership agreement? It seems that the partnership agreement is not determinative for tax law, but I am not sure how much hair-splitting is expected on my end. Any insights on how to proceed with any of this would be greatly appreciated.