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]

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.

[George4Tacks · Accepted solution]

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. 

[linette]

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.

[dorbitz]

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.

[dorbitz]

So really, the new partner just gave him a "gift".? He didn't give it to the LLC.

[Ernie]

Personally, there was no gift.  It was a sale of part of the business.

[sjrcpa]

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.

[Ernie]

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."

[dorbitz]

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).

[sjrcpa]

This is not a gift-there is no disinterested generosity. It is a sale.

[dorbitz]

sjrcpa, I tend to agree with you and have said that which you said, BUT attorney see's it differently.

[IRonMaN]

As a point of interest, most attornies know diddly about tax law.  This is not a gifting situation.

[George4Tacks]

"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

[IRonMaN]

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.

[dorbitz]

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.

[IRonMaN]

He reports a gain on the sale of a portion of his interest on his 1040.

[abctax55]

"....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.

[itonewbie]

"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.

[sjrcpa]

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.

[abctax55]

Lunch is on me IF there's a balance sheet....LOL.

[IRonMaN]

"Lunch is on me IF there's a balance sheet"

That IF crossed my mind too

[sjrcpa]

I thinks so, too but thought I'd ask anyway.

[dorbitz]

Thank you sjrcpa..the business is only starting it's second year. It's a schedule C for 2017....thanks everyone.
 

[garman22]

"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

[IRonMaN]

I was there for 3 minutes and I started getting claustrophobic and had to leave.

[garman22]

Lol....no surprise there my friend. :laughing: