draws from an LLC after sale of LLC

[schirallicpa]

LLC is held as sole proprietorship.  Sept 1 the LLC was sold to another proprietor.  (To me, they should have been an S-corp and made the transition easier, but there was a lawyer involved that told them to stay an LLC and just sell the LLC.) So far that works fine.........but.........the 1st SP continues to take money on a weekly basis September thru December.  Prior to this sale, I would have considered it as a draw.  He's an SP.  He can take all the money his wants, right?  I had run estimates on all this in September and it didn't occur to me that he would still be taking this money or that it may or may not still be his taking from the equity.  The business is profitable and would have "retained earnings" of a sizable amount if it were a S-corp.  He insists (of course) that this is still his equity that he is taking.  (On top of a weekly payment on the sale) and is arguing with me that it should not be construed as income to him.  I'm thinking it is taxable income.  

Love to hear your input.  

 

[Abby Normal]

Where is this money coming from? Existing bank account for the LLC that was not sold to the new owner? Is there income coming into this account. How were the books kept for this LLC? SP draws are not income.

By the way, for tax purposes, you have to treat the sale as a sale of assets, not a sale of the LLC.

[jklcpa]

You have an asset sale to report on the sale of the proprietorship to the new owner.

Then, as Abby said, the withdrawals of cash by him do not create income. He is just taking his own money out.

Has he officially closed the LLC down with the state or keeping that open for some reason? Why is he keeping the SMLLC bank account open?  He could close that at any time without any tax effect. 

[schirallicpa]

He did not close account.  New owner had held it with him jointly for years.  So it was easier for sales tax, payroll and all the other EFTs to continue.  

Yes - sale of assets.

The books are kept in QB and reconciled regularly.  Payroll is thru Paychex.  I think the bookkeeping is in pretty good shape. 

[Abby Normal]

So is he stealing money from the new owner?

Is the money part of the purchase price?

Is it his equity? Is that being tracked?

How is the new business accounting for this?

I'm confused.

[DANRVAN]

2 hours ago, schirallicpa said:

but there was a lawyer involved that told them to stay an LLC and just sell the LLC.)

Sell a SMLLC?  How?

1 hour ago, schirallicpa said:

  New owner had held it with him jointly for years. 

What?!  Is there a relation between the buyer and seller?

[schirallicpa]

Buyer and seller are friends.  Seller over years had buyer's name on joint business account.  No stealing.  Seller actually still has access to bank and can see what's going on.  All on the up and up.  They've been keeping track of the money/draws/equity.  I got hung up on the seller still getting a draw each week.  But I think this chat has helped me understand that that was still his money to draw.  And we have an accounting at date of sale of equity and we keep a separate account for his draws.  

This tax season just seems a little sticky, doesn't it?

[jklcpa]

 I'm as confused as everyone else by this. This sounds more like a partnership with one partner selling to the other, and that this was incorrectly handled as two proprietorships. If not, how does your client explain the shared checking account?

[schirallicpa]

I agree to some extent.  It was not a partnership in legal terms and the second guy (now buyer) was on wage and was placed on checking account as any other business would have a second person on the account.  So only in the first few months of 2023 did this idea of selling come into play.  Bring in the lawyer, and we "sell the LLC".  Which it is a sale of assets.