LLC question

[pcmcpa]

The Idea:

A, B, & C decide to open an LLC with A owning 25.5% of the business, B owning 25.5% of the business and C owning 49% of the business. Profits & losses to be split in their ownership percentage. A & B were to contribute $1 million each to start up and run the business, C was to run the business and was not required to provide any upfront money.

Reality:

A & B contributed the $1 million each. C ran the business. First three years tax returns filed showing A & B as 50% owners and sharing income and loss in that percentage.

To fix this:

The LLC Operating Agreement is written up (another little thing that was over looked, no written operating agreement) to show C as a 49% owner as of 1/1/2010 (with no capital contribution from him) and partners A & B changed to 25.5% ownership and profit & loss splitting (note: 1/1/2010 was selected as going back prior to that would mean amending all of the LLC and individual member returns). Under the "Dissolving or selling interests or buying out a member" section of the LLC operating Agreement, a section detailing how A & B would need to recoup their 12/31/09 capital account balances prior to C receiving any share of assets, and at that point the three members would split the assets in their 49/25.5/25.5 percentages.

Questions:

1) Would a gift tax return need to be filed (I'm thinking "No".)?

2) Has anyone seen this in action? If so, did it work, or was it a disaster?

Thank you in advance for your responses.

[Pacun]

I think you will need to close the first LLC and open a new one. Amend any taxes on the old LLC and start fresh and correctly on the new LLC.