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Single member LLC sold 5% of his business to a new member. It is paid to him as personal (per the attorney). He rents everything, no assets. How do I handle the sale?

dorbitz
Level 2

Again per attorney, original owner will lend the new "partnership" the money to open a new location. The new member has to forgo his draws up to the amount of that loan before he can "take" a draw based on profits. 

So on the original owners 1040, the money received has no basis. He says "it's the right to come in on a good business". Are we talking "goodwill" here?

Thank you.

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George4Tacks
Level 15

You really need to get the answer to this from the attorney and the paid tax professional that is involved. To me, your description makes no sense. It really started to sound like a sale of a partnership interest which may or may not have basis, but then some other right comes into play. 

If you are a paid preparer, get a really large retainer before taking this mess on. 


ex-AllStar

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25 Replies 25
George4Tacks
Level 15

You really need to get the answer to this from the attorney and the paid tax professional that is involved. To me, your description makes no sense. It really started to sound like a sale of a partnership interest which may or may not have basis, but then some other right comes into play. 

If you are a paid preparer, get a really large retainer before taking this mess on. 


ex-AllStar

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linette
Level 5
Yes I agree that you need to make sure you are understanding what the attorney has done.   You don't say the tax filing of the LLC prior to this change.  If it is a single owner LLC what is sounds like is that the single owner LLC is converting to a partnership.  Money going directly to the original owner is not making sense and may or may not be a sale to the original owner.  But, once the partnership is formed then the original owner will loan the partnership money.  They agree no draws on profits will be taken until the loan is paid off.  

Since the attorney is involved, you should have a partnership agreement that spells all of this out.  Ask the client for a copy of the partnership agreement.  Then tread lightly on what returns and what work you are willing to do until you understand the ramifications of that work.
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dorbitz
Level 2
Thank you, sorry for the poor description. I am in touch with the attorney, I'll have to drill him down on this more.  But yes, it's a single member llc becoming a partnership. But the monies paid up front are not the LLC's they are the owners personal monies.
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dorbitz
Level 2
So really, the new partner just gave him a "gift".? He didn't give it to the LLC.
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Ernie
Level 9
Personally, there was no gift.  It was a sale of part of the business.
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sjrcpa
Level 15
100% owner sold 5% to someone. Its a sale of 5% of the assets of the business. Some is ordinary income and some is capital gain. Assets include AR, Goodwill, etc.You need the sale agreement and the LLC Oerating Agreement and the loan agreement.

ex-AllStar
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Ernie
Level 9
I can see it now "I have this business worth $1 million dollars.  Who will give a gift of $1 million dollars in exchange for it.  It is not income to me just a gift from the person I am giving the business to."
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dorbitz
Level 2
First, there are no assets, everything is rented, no A/R. Yes Ernie, that is the way the owner says it. I have a great business (unique) and you can become a 5% owner. Mayby that is why the payments are $15,000. a year for 3 years, (gift tax).
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sjrcpa
Level 15
This is not a gift-there is no disinterested generosity. It is a sale.

ex-AllStar
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dorbitz
Level 2
sjrcpa, I tend to agree with you and have said that which you said, BUT attorney see's it differently.
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IRonMaN
Level 15
As a point of interest, most attornies know diddly about tax law.  This is not a gifting situation.

Pot Stirrer Gold Medalist - Rio de Janeiro Games
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George4Tacks
Level 15
"most attornies know diddly about tax law." That is being gracious.  
P.S. my spell check burped on attornies, so with the help of Dr. Google it was happy with attorneys.
P.P.S. I get distracted easily

ex-AllStar
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IRonMaN
Level 15
Yeah, I'm not sure why I spelled it that way.  I'll go sit in the corner for 15 minutes as my self imposed punishment.

Pot Stirrer Gold Medalist - Rio de Janeiro Games
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dorbitz
Level 2
then back to sjrcpa's point..if it is a sale and with no assets (except and cash register and scale) (no it's not a drug business, lol) It's a sale but with no basis.? They don't want the money on the LLC's books, I'm at a lost. Sorry, so to make the attorney happy how can I recognize the money on his 1040.
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IRonMaN
Level 15
He reports a gain on the sale of a portion of his interest on his 1040.

Pot Stirrer Gold Medalist - Rio de Janeiro Games
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abctax55
Level 15
"....so to make the attorney happy "
I'd worry more about the IRS being happy.  
OR, let the attorney do the tax return, since s/he appears to be so, so knowledgeable.
(I wanna be a member of the pot stirring club too)
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itonewbie
Level 15
"I'd worry more about the IRS being happy."
And worry about putting your neck on the line...
... even if you make a disclosure, there has to be a reasonable basis for the position.
---------------------------------------------------------------------------------
Still an AllStar
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sjrcpa
Level 15
Don't get hung up on the fact the sale poceeds go the original 100% owner. He is selling 5% of his interest in the LLC. He is the seller. His basis in the LLC is his investment plus cumulative profits less losses and less distributions. What does the Balance Sheet look l;ike? Everything on it has a basis and some items maynhave a zero tax basis.He reports the sale on his 1040.

ex-AllStar
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abctax55
Level 15
Lunch is on me IF there's a balance sheet....LOL.
(I wanna be a member of the pot stirring club too)
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IRonMaN
Level 15
"Lunch is on me IF there's a balance sheet"

That IF crossed my mind too :smile:

Pot Stirrer Gold Medalist - Rio de Janeiro Games
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sjrcpa
Level 15
I thinks so, too but thought I'd ask anyway.

ex-AllStar
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dorbitz
Level 2
Thank you sjrcpa..the business is only starting it's second year. It's a schedule C for 2017....thanks everyone.
 
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garman22
Level 12
Level 12
"Yeah, I'm not sure why I spelled it that way.  I'll go sit in the corner for 15 minutes as my self imposed punishment."

Is that even possible @IRonMaN
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IRonMaN
Level 15
I was there for 3 minutes and I started getting claustrophobic and had to leave.

Pot Stirrer Gold Medalist - Rio de Janeiro Games
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garman22
Level 12
Level 12
Lol....no surprise there my friend. :laughing::laughing:
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