Suppose a two-member LLC taxed as a partnership has a set of projects that are joint initiatives of the members, as well as projects that are solo initiatives of one or the other member. For example, the same corporate entity handles a shared venture and solo consulting work by each member.
What is the right way to calculate the allocations for profit, loss, and capital?
Consider only the solo projects for now. Easy case: both members have net positive income from their projects, or both have net negative income. Then the percentage split of profit or loss is clear.
Challenging case: member A's project has net positive income: gross revenue is $50k, expenses are $5k. But member B's project has net negative income: gross revenue $45k, expenses $50k.
The business as a whole has net positive income: $40k. But one partner's project is in the red, while the other is in the black. What is the standard way to calculate the profit and loss percentage splits?
Should A receive a 50/95 share of profit and a 5/55 share of loss? This strikes me as incorrect, because net negative income would be recorded as a negative profit for form 1065. If so, then how can profit and loss be allocated fairly in this situation?