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Tax Planning/Partnership Revision

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Question
Hi. My question involves an existing LLC that is taxed as a partnership. Currently there are two members: A (90% interest) and B (10% interest). A wishes to be bought out. The company is valued at approximately $445,000. The company has agreed to buy out A for $400,000 (cash upfront and a promissory note). At the same time, a new member (C) will be investing $50,000. B and C have agreed that C will have an 80% interest in the company, and B's interest will increase from 10% to 20%. My questions are:

1) Is this a taxable event for C? If so, can this be avoided or postponed?
2) Would the capital accounts show $50,000 for C and $45,000 ($445,000 value - $400,000 buyout) for B?
3) Are there any taxable events for B?

Thanks in advance.

Answer
Let me take the easy one first.

If C invests $50,000 he will be investing after tax dollars. Investment or the purchase of stock or ownership interest is not a taxable event.

No need to avoid or postpone.

As to the rest of the plan. . .

That would not be my plan.

I think you are confusing a few terms.

A companies true value is determined solely by the freemarket offer and acceptance. If someone offers to sell their interest and someone else gives them the money for it, then you have a true value.

Otherwise we are just guessing. Those guesses are often called appraisals; an estimate applying some irrelevant rules of thumb.

Let's reserve the idea of company value for a conversation where it would apply. Because if you apply it here, you are creating tax issues that wouldn't otherwise exist.

I'm not trying to parse words. But if you are planning to formalize this and execute it. You can get yourself in to some serious problems if you use the wrong words.

IF you follow your plan and:

"A gets bought out by the company" then A would have a taxable event on the total value of the transaction (Cash and Promissory note value) up front.

If B buys out A then B has to make that purchase with his own after tax money, not the companies money. That $400,000 will require you earn $700,000 to *800,000 so that when you pay all the taxes you'll have $400,000 left.

If on the other hand A withdraws A's already taxed capital, at value, then there is no taxable event for A, B, or the company.

The value of the LLC is NOT what is in the bank account.

If the money in the bank account has already been attributed to the owners for tax purposes then that money is nothing more than undistributed capital.

I hope that I have cleared up a few points on your plan. It may have created more questions in you mind. If you would like ot call me, I'd try to answer them for you.

Richard Fritzler
The Business Designers
800 658-5105

Tax Planning

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Richard Fritzler

Expertise

I am in the business of tax planning for business owners. Our company helps business owners structure so that they can be reduce the taxes that they owe, making them far more profitable.

Experience

Since 1986 I have been helping successful business owners reduce taxes, protect assets, and limit their liability. The company is Owelesstax, incorporated at www.owelesstax.com


Organizations
National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
The Business Owners Institute

Publications
Contributing author to "The Corporate Standard Newsletter".
I am also a writer for an email newsletter about business
Googlegroups/Successfulbusiness
I am also an Expert in the areas of Tax Law, Retirement Planning, and Estate tax issues.

Education/Credentials
I have been in the business of assisting business owners in reducing their taxes and liability for over 17 years. Providing retirement option that are not just tax deferred, and not limited to a "token" tax free contribution. Retirement plans that allow for total and complete access before you are 59.5 with no penalties

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