Two member LLC.....one member buys out the other.

This is an interesting situation and I'd hoped somebody would have chimed in. The partnership has been dissolved and a final 1065 is required--if you dissolve an LLC then the state should be notified. So, the $64 question is (not looking at the tax aspects, which might include a loss for you), must the LLC (state entity) be dissolved because the partnership (federal entity) dissolved?

I don't see why. The LLC status and tax status are separate. In buying out his partner/co-owner, he becomes the sole owner of the LLC, and files taxes accordingly.

The balance sheet of the partnership shows about $500K net worth ($250K each). My client bought out the other partner for $100K. Dissolving the partnership is the only way I can think to handle this situation....but would entertain other ideas!

If the partnership dissolves, and I file a final 1065, it seems my client has a $150K long term capital gain. (He paid $100K for a $250K interest). Is this right?

Is there other ways this should be handled? Because my client is continuing the business with no interruption, there seems there should be a way to defer this gain...but I do not know how.

The attorney has said the agreement can be amended to allow the LLC to continue legally as an SMLLC in the States eyes. I don't know for sure how he is going to handle that.....but this is his area of expertise.

The attorney has suggested we could have the LLC itself buy out the partner instead of my client individually. However,I do not see that would change the tax aspect of this.

Any ideas, suggestions, teaching, and discussion is appreciated.

Of course it dissolves the partnership. But that doesn't mean it dissolves the LLC. A partnership must have two or more members, but an LLC only needs one.

Why is he getting that deal? Is it a gift? Is there a business reason for it? I can't see that there's any taxable gain until he sells.

If you buy something for less than it may be worth, you are normally not taxed until the thing is sold. Say you find a painting at Goodwill that they'll sell you for $25. It turns out to be worth $1,000,000. When do you pay tax on it? Not when the purchase is made.

It's not a problem because it has nothing to do with taxes.

Probably not but without the numbers there is no way to tell. Likely your client just adjusts the basis of the LLC's assets down. See

You might want to see if they can fit the payments into the 736(b)(2). I doubt the seller wants this treatment.

I would rely on the attorney. In NC, the LLC would automatically be a SMLLC unless the organizing documents said otherwise.

Why does he suggest this?

Have you looked at 1.708-1(b)? Are there any hot assets under 751(a)? Are there any 704(c) assets?

Please forgive anywhere I was not clear, just dashed this off before leaving for an appointment.

Drew Edmundson, CPA Cary, NC

Attorneys can be very creative, but when it comes to taxes most are just shooting in the dark.

After I file the final 1065 return, do I simply have my own working papers to transfer the assets to the individual schedule C? Do I have to charge the LLC 1/2 year depreciation...etc for the close down year.....or do I give the parnership a full year depreciation, and none to the personal return??? It will be hard to force the software to handle this issue....I am filing a final return in the middle of the year....but I do not want the assets or anything else on the return to reflect the closing of a business. Maybe when I get into the return and actually am doing it, I will see it all come together, but right now things seem fuzzy.

For some reason, this LLC seems to be written in such a way that the LLC would dissolve if an occurance caused the LLC to cease to be treated as a Partnership. I spoke with the attorney about this wording, and he thought he could remedy the situation without any problems!

I believe he thinks he may have messed up with the wording of the LLC agreement. He was told from the first day, that the two owners would probably not continue in businsee for many years, but rather only a few. It seems the attorney thinks if the LLC bought out the transferor, it would resolve the wording of the agreement. My client went to the bank in the name of the LLC and borrowed the money to buy out the transferor, so in essence, the LLC (not my client) bought the other client out. Therefore in the attorney's eyes all is well.

I am going to study these areas tomorrow. I have let myself stay here too long as is!

Drew!...are you kidding??? Any help and guidance is more than appreciated. I will take longer looks at the code and try to put this together in my head. Thanks for your help so far.

The 1065 will get depreciation using the short-year rules.

The law in this area is more often substance over form. There can be a difference when the "partnership" buys out a partner versus when a partner buys out a partner. So you need to figure out which way the IRS/courts view it.

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Drew Edmundson, CPA Cary, NC