Two member LLC.....one member buys out the other.
mmurrell
of years now. He just recently (10/31/2009) bought out his partner.
There are no employees, and they have filed a form 1065 partnership
return since their inception.
The remaining member (my client) wants the LLC to continue with its
original name, and be afforded the LLC limited liability as a SMLLC.
To his clients, there world there would be no changes.
I understand the SMLLC is a disregarded entity as far as the IRS is
concerned. My client does not want to be a corporation, and would
rather file as a sole proprietorship schedule C.
What do I have to do?
Do I have to file a final 1065 and report this as a dissolution of the
partnership and claim it as a taxable transaction to my client?
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Brew1
> I have a client who has been a member in a two member LLC for a couple
> of years now. �He just recently (10/31/2009) bought out his partner.
> There are no employees, and they have filed a form 1065 partnership
> return since their inception.
>
> The remaining member (my client) wants the LLC to continue with its
> original name, and be afforded the LLC limited liability as a SMLLC.
> To his clients, there world there would be no changes.
>
> I understand the SMLLC is a disregarded entity as far as the IRS is
> concerned. �My client does not want to be a corporation, and would
> rather file as a sole proprietorship schedule C.
>
> What do I have to do?
>
> Do I have to file a final 1065 and report this as a dissolution of the
> partnership and claim it as a taxable transaction to my client?
>
chimed in. The partnership has been dissolved and a final 1065 is
required--if you dissolve an LLC then the state should be notified.
So, the $64 question is (not looking at the tax aspects, which might
include a loss for you), must the LLC (state entity) be dissolved
because the partnership (federal entity) dissolved?
Stuart A. Bronstein
>> I have a client who has been a member in a two member LLC for a
>> couple of years now. �He just recently (10/31/2009) bought out
>> his partner. There are no employees, and they have filed a form
>> 1065 partnership return since their inception.
>>
>> Do I have to file a final 1065 and report this as a dissolution
>> of the partnership and claim it as a taxable transaction to my
>> client?
>>
> This is an interesting situation and I'd hoped somebody would
> have chimed in. The partnership has been dissolved and a final
> 1065 is required--if you dissolve an LLC then the state should
> be notified. So, the $64 question is (not looking at the tax
> aspects, which might include a loss for you), must the LLC
> (state entity) be dissolved because the partnership (federal
> entity) dissolved?
I don't see why. The LLC status and tax status are separate. In
buying out his partner/co-owner, he becomes the sole owner of the
LLC, and files taxes accordingly.
--
Stu
http://downtoearthlawyer.com
mmurrell
($250K each). My client bought out the other partner for $100K.
Dissolving the partnership is the only way I can think to handle this
situation....but would entertain other ideas!
If the partnership dissolves, and I file a final 1065, it seems my
client has a $150K long term capital gain. (He paid $100K for a $250K
interest). Is this right?
Is there other ways this should be handled? Because my client is
continuing the business with no interruption, there seems there should
be a way to defer this gain...but I do not know how.
The attorney has said the agreement can be amended to allow the LLC to
continue legally as an SMLLC in the States eyes. I don't know for
sure how he is going to handle that.....but this is his area of
expertise.
The attorney has suggested we could have the LLC itself buy out the
partner instead of my client individually. However,I do not see that
would change the tax aspect of this.
Any ideas, suggestions, teaching, and discussion is appreciated.
Stuart A. Bronstein
> The balance sheet of the partnership shows about $500K net worth
> ($250K each). My client bought out the other partner for $100K.
> Dissolving the partnership is the only way I can think to handle
> this situation....but would entertain other ideas!
Of course it dissolves the partnership. But that doesn't mean it
dissolves the LLC. A partnership must have two or more members,
but an LLC only needs one.
> If the partnership dissolves, and I file a final 1065, it seems
> my client has a $150K long term capital gain. (He paid $100K
> for a $250K interest). Is this right?
Why is he getting that deal? Is it a gift? Is there a business
reason for it? I can't see that there's any taxable gain until he
sells.
> Is there other ways this should be handled? Because my client
> is continuing the business with no interruption, there seems
> there should be a way to defer this gain...but I do not know
> how.
If you buy something for less than it may be worth, you are
normally not taxed until the thing is sold. Say you find a
painting at Goodwill that they'll sell you for $25. It turns out
to be worth $1,000,000. When do you pay tax on it? Not when the
purchase is made.
> The attorney has said the agreement can be amended to allow the
> LLC to continue legally as an SMLLC in the States eyes. I don't
> know for sure how he is going to handle that.....but this is his
> area of expertise.
It's not a problem because it has nothing to do with taxes.
--
Stu
http://downtoearthlawyer.com
Drew Edmundson
wrote:
>The balance sheet of the partnership shows about $500K net worth
>($250K each). My client bought out the other partner for $100K.
>Dissolving the partnership is the only way I can think to handle this
>situation....but would entertain other ideas!
>
>If the partnership dissolves, and I file a final 1065, it seems my
>client has a $150K long term capital gain. (He paid $100K for a $250K
>interest). Is this right?
Probably not but without the numbers there is no way to tell. Likely
your client just adjusts the basis of the LLC's assets down. See
732(c).
>Is there other ways this should be handled? Because my client is
>continuing the business with no interruption, there seems there should
>be a way to defer this gain...but I do not know how.
You might want to see if they can fit the payments into the 736(b)(2).
I doubt the seller wants this treatment.
>The attorney has said the agreement can be amended to allow the LLC to
>continue legally as an SMLLC in the States eyes. I don't know for
>sure how he is going to handle that.....but this is his area of
>expertise.
I would rely on the attorney. In NC, the LLC would automatically be a
SMLLC unless the organizing documents said otherwise.
>The attorney has suggested we could have the LLC itself buy out the
>partner instead of my client individually. However,I do not see that
>would change the tax aspect of this.
Why does he suggest this?
>Any ideas, suggestions, teaching, and discussion is appreciated.
Have you looked at 1.708-1(b)? Are there any hot assets under 751(a)?
Are there any 704(c) assets?
Please forgive anywhere I was not clear, just dashed this off before
leaving for an appointment.
Drew Edmundson, CPA
Cary, NC
Stuart A. Bronstein
>>The attorney has suggested we could have the LLC itself buy out
>>the partner instead of my client individually. However,I do not
>>see that would change the tax aspect of this.
>
> Why does he suggest this?
Attorneys can be very creative, but when it comes to taxes most are
just shooting in the dark.
--
Stu
http://downtoearthlawyer.com
mmurrell
> >If the partnership dissolves, and I file a final 1065, it seems my
> >client has a $150K long term capital gain. �(He paid $100K for a $250K
> >interest). �Is this right?
>
> Probably not but without the numbers there is no way to tell. Likely
> your client just adjusts the basis of theLLC'sassets down. See
> 732(c).
After I file the final 1065 return, do I simply have my own working
papers to transfer the assets to the individual schedule C? Do I have
to charge the LLC 1/2 year depreciation...etc for the close down
year.....or do I give the parnership a full year depreciation, and
none to the personal return??? It will be hard to force the software
to handle this issue....I am filing a final return in the middle of
the year....but I do not want the assets or anything else on the
return to reflect the closing of a business. Maybe when I get into
the return and actually am doing it, I will see it all come together,
but right now things seem fuzzy.
> >Is there other ways this should be handled? �Because my client is
> >continuing the business with no interruption, there seems there should
> >be a way to defer this gain...but I do not know how.
>
> You might want to see if they can fit the payments into the 736(b)(2).
> I doubt the seller wants this treatment.
>
>
> I would rely on the attorney. In NC, theLLCwould automatically be a
> SMLLC unless the organizing documents said otherwise.
For some reason, this LLC seems to be written in such a way that the
LLC would dissolve if an occurance caused the LLC to cease to be
treated as a Partnership. I spoke with the attorney about this
wording, and he thought he could remedy the situation without any
problems!
>
> >The attorney has suggested we could have theLLCitself buy out the
> >partner instead of my client individually. �However,I do not see that
> >would change the tax aspect of this.
>
> Why does he suggest this?
I believe he thinks he may have messed up with the wording of the LLC
agreement. He was told from the first day, that the two owners would
probably not continue in businsee for many years, but rather only a
few. It seems the attorney thinks if the LLC bought out the
transferor, it would resolve the wording of the agreement. My client
went to the bank in the name of the LLC and borrowed the money to buy
out the transferor, so in essence, the LLC (not my client) bought the
other client out. Therefore in the attorney's eyes all is well.
> Have you looked at 1.708-1(b)? Are there any hot assets under 751(a)?
> Are there any 704(c) assets?
I am going to study these areas tomorrow. I have let myself stay here
too long as is!
>
> Please forgive anywhere I was not clear, just dashed this off before
> leaving for an appointment.
Drew!...are you kidding??? Any help and guidance is more than
appreciated. I will take longer looks at the code and try to put this
together in my head. Thanks for your help so far.
Drew Edmundson
wrote:
>
>> >If the partnership dissolves, and I file a final 1065, it seems my
>> >client has a $150K long term capital gain. �(He paid $100K for a $250K
>> >interest). �Is this right?
>>
>> Probably not but without the numbers there is no way to tell. Likely
>> your client just adjusts the basis of theLLC'sassets down. See
>> 732(c).
>
>After I file the final 1065 return, do I simply have my own working
>papers to transfer the assets to the individual schedule C? Do I have
>to charge the LLC 1/2 year depreciation...etc for the close down
>year.....or do I give the parnership a full year depreciation, and
>none to the personal return??? It will be hard to force the software
>to handle this issue....I am filing a final return in the middle of
>the year....but I do not want the assets or anything else on the
>return to reflect the closing of a business. Maybe when I get into
>the return and actually am doing it, I will see it all come together,
>but right now things seem fuzzy.
The 1065 will get depreciation using the short-year rules.
>> >Is there other ways this should be handled? �Because my client is
>> >continuing the business with no interruption, there seems there should
>> >be a way to defer this gain...but I do not know how.
>>
>> You might want to see if they can fit the payments into the 736(b)(2).
>> I doubt the seller wants this treatment.
>>
>>
>> I would rely on the attorney. In NC, theLLCwould automatically be a
>> SMLLC unless the organizing documents said otherwise.
>
>For some reason, this LLC seems to be written in such a way that the
>LLC would dissolve if an occurance caused the LLC to cease to be
>treated as a Partnership. I spoke with the attorney about this
>wording, and he thought he could remedy the situation without any
>problems!
>>
>> >The attorney has suggested we could have theLLCitself buy out the
>> >partner instead of my client individually. �However,I do not see that
>> >would change the tax aspect of this.
>>
>> Why does he suggest this?
>
>I believe he thinks he may have messed up with the wording of the LLC
>agreement. He was told from the first day, that the two owners would
>probably not continue in businsee for many years, but rather only a
>few. It seems the attorney thinks if the LLC bought out the
>transferor, it would resolve the wording of the agreement. My client
>went to the bank in the name of the LLC and borrowed the money to buy
>out the transferor, so in essence, the LLC (not my client) bought the
>other client out. Therefore in the attorney's eyes all is well.
The law in this area is more often substance over form. There can be a
difference when the "partnership" buys out a partner versus when a
partner buys out a partner. So you need to figure out which way the
IRS/courts view it.
>> Have you looked at 1.708-1(b)? Are there any hot assets under 751(a)?
>> Are there any 704(c) assets?
>
>I am going to study these areas tomorrow. I have let myself stay here
>too long as is!
snip
Drew Edmundson, CPA
Cary, NC
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