I currently hold a 50% ownership interest in an LLC with one other partner who holds the additional 50% interest. To date the business has shown a loss and has relatively little assets (website). I plan to buy the partner out for $600. I will then be selling 49% of my ownership interest in the LLC to two new partners for $300 each for a 24.5% share in the business. This will all happen within a two month time span. What are my tax implications? Is it a concern that I will be the sole owner of the business for a short time (single member LLC) and then moving back to a multi-owner operation (partnership) all within one tax year? Will I be paying capital gains tax when I sell the shares? Will I get any tax benefit when I purchase my old partners shares? From what I have read it seems like Ill be taking a 20% hit ($120) on taxes for what seems like it should just be a simple buy from one and sell to another wash type sale? Help, Advice please! Thanks in advance for your help.
You have multiple issues to address -
First - when you buy out the other person it will technically terminate the existing partnership so you'll likely need to file a final return for the short year - assuming you follow the plan you've outlined above.
Second - your acquisition of his interest will have NO tax benefit to you any more than buying more stock in IBM would. Your basis will increase, but that won't matter till you pass through a loss or sell part of your investment. You may not need to get a new TIN since you can use your SSN as a SMLLC.
Third - when you take on two additional partners you'll essentially be spooling up a NEW partnership. The OLD LLC will continue to exist through all of this but the IRS has no way of dealing with it, as far as I know. You'll almost certainly need to get a new TIN.
A different way to approach this might be to have the 2 new partners buy direct from the departing partner, which you buying 1% of his existing interest. This gets you to the same place with one less hoop. NOTE that even doing this will require that you file TWO returns for the same entity for the same calendar year. It will result in a TECHNICAL TERMINATION of the partnership for tax purposes which requires two returns to be filed.
Alternatively, have your spouse or brother or best friend, buy 49% of his interest, with you buying 1%. That gets him out and you in and keeps the 1065 alive and well, though you will still have a technical termination issue to deal with. Then your spouse/brother/buddy can sell their share to the new members/partners. If done correctly there should be no need for a technical termination filing on the SECOND change in ownership since it will be less than a 50% or more change.
You should also seriously consider a binding agreement with your spouse/sibling/friend to buy them out at a specific date and you may want to update the operating agreement to specifically allocate income, losses, gains and credits in a manner sufficient to entice your interim owners to get on board.
answered 26 Apr '11, 17:21