Help with LLC Partnership

[mdmcfarland]

I have a LLC Partnership with 12 owners(!). The partner with the largest share is buying out four of the partners. The partners being bought out contributed no capital when the partnership was formed. The only capital they have is what has been earned since the partnership was formed. Would the buying partner just have to pay them what capital they now have? How do I show this on the return?

[kcjenkins]

This is just like buying out stockholders in a corp, basically. What he has to pay them is whatever they agree to take. If he pays them an amount equal to their capital accounts, that does make their book entry simple and neat. But whether he pays them that, or more, or less, is part of their personal transaction. Either way, the LLC books the transfer of the capital by debiting their capital and crediting his, for the book value of their capital. The profit or loss, if any, is only on their personal books. He's not paying the LLC, so how much he pays to buy them out is irrelevant to the LLC books.

[mcb39]

I had one of these a few years ago and it was far from simple. I still have all of the paperwork and calculations. First of all get Pub 541. In our case, the departing partner wanted to be paid over and above his capital account and in order to get rid of him, an amount had to be agreed on. Also, we had inventory and real estate involvement. In the final analysis, though the purchasing partner increases his capital account. The selling partner has to report the Gain as Capital or Ordinary, whichever applies. That would only be on ANY GAIN. His Capital Account is return of his capital plus or minus any gains or losses; but that is the job of HIS accountant. Yours is simply to report the sale and that is done on the 1065 and Form 8308. You may also have to file two short year 1065's; one for before the split and one for after the split depending on when the change occurred. It isn't really as difficult as it sounds if you take it one step at a time or get some help from a colleague who is familiar with Partnership Returns.

[jainen]

>>The partner with the largest share is buying out four of the partners<<

If the four retiring partners own more than 50%, the partnership will terminate and become a new partnership requiring short year returns and other accounting.

[kcjenkins]

One other thing, which I should have mentioned earlier. With an LLC, it is important to read the actual Operating Agreement, which SHOULD specify how the departing members accounts are to be handled, and how their share is to be valued. Of course, some have poor agreements, but even the worst will have some sort of guidance in them.

[mdmcfarland]

Thanks to all of you for your help.

Jainen - the 4 partners that are selling only have a total of 12% ownership. The buying partner will have only 25.50% share after the buyout.

kcjenkins - the only thing I see in the agreement is that they will sell to the to the partnership ( I assume they meant the remaining partners) and not to the general public.

[kcjenkins]

Sounds like they bought one of those cookie-cutter LLC kits, which have generally lousy Op Agreements. Hopefully, the departing members will go peacefully.

[mdmcfarland]

The members leaving have only very small shares. It is all within a family. The biggest member gave these 4 members (neices and nephews) each a small share in the beginning with them contributing no money or assets. The rest of the remaining members are all his own children. It was setup with the help of an attorney, but has been very informal since then.

[RoyDaleOne]

Any "hot assets"? Ordinary income?

Step-up basis for additional money paid?

[mdmcfarland]

They did have some ordinary income each year including 2007, but none of them ever paid in any additional money to the company.

[mcb39]

They would have already paid tax on the ordinary income each year that they received it; whether it was put into their capital account or withdrawn. Your comments lead me to believe that you are doing the returns for the LLC as well as for the departing partners. We really don't have enough facts here to tell you what to do....

[RoyDaleOne]

For example if the LLC is on the cash basis and has $500,000 in accounts receivable,

the selling partner must take the unreported A/R's in to effect when they sell

their partnership interest. Hot assets are those items that would produce

regular income but which are not tax as of yet. Depreciation recapture is

also is a hot asset.

The LLC could elect to step up the basis of assets if the partner pays

more then book value.

[gwenzel]

Don't forget to take into account the departing partner's share of the receivables and liabilities. I'm working on a partner buyout as well and had to study it like I was bac in college! (Not going to say how long ago that was!)

[mdmcfarland]

I am actually doing the return for the partnership and the buying member. The first few answers made this sound like it may be simple. Now it sounds like it is getting more complicated.

The only assets in this partnership are some cows and calves. When I entered the purchase(selling) date on teh return, it automatically marked the selling members K-1's as Final. The ordinary income was prorated for the number of days they were members in 2007 as well as their percentage of interest.

[RoyDaleOne]

Do you have a zero basis herd? The goal of all farmers,

for tax purposes.

Well, your last post makes it a simple task to do.

At least it not a tax practice with a/r wip, etc.

:)