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Richard - Bizlaw
Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 10566
Experience:  30 years of corporate, litigation and international law
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I am a US permanent resident, I have a partnership LLC with

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I have a partnership LLC. I have 50% and live in Florida and my partner (french citizen) have 50% and live in France.
I want to buy my partner shares, we both agreed on the amount. Can my partner take this money out of the LLC profits and in exchange he will give me his 50% share, or should I pay him the amount with my personal money.
My partner think that he will have to pay taxes in both US and France if he take money from the LLC profit but that if I just buy him the share with my personal money he will not have to pay tax in the US.
Is that true?
In the case that I buy his shares with my personal money can I write off this money in my tax return?
When you say use your own personal money are you saying without using any of the resources of the LLC? Is tjhe price you agreed to greater than the value of your partner's capital account?
Customer: replied 6 years ago.
Yes, when I say personal money is without using any resources from the LLC.
We have about 150K of profit in the LLC for 2010, we agreed that he will walk out the business with 100K and that he will give me his 50% share in exchange. Now I am trying to find a way so he can have the 100K without having any of us taxed twice.

Here is how things work. If you have $150,000 of profits as of now, he will be taxed on 50% of that or $75,000. That will be taxed at ordinary income tax rates. This is a pass through tax unless your LLC is taxed as a corporation. Unless your LLC is taxed as a corporation, there is no tax at the LLC level. The additional $25,000 will be taxed at capital gains rates assuming that when he gets paid the $75,000 his capital account is reduced to $0. His account would be reduced to $0 if he had no investment in the business, and the business had no assets other than the current year's profits. If this business is US based, these US taxes will not be avoided. However, he will probably receive a credit for the taxes paid in the US against any French taxes.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer: replied 6 years ago.
Sorry I do not understand everything.
Yes, there is $75K profits as of now, but this will probably change before the end of the year. How the IRS will know that our profit was 75K as of know? do we have to fill out paperwork before the end of the year to notify the IRS?
I don't understand what's capital gains.

Our LLC is not taxed as a corporation, we both did not invest anything in it and we have not assets in the business.

An LLC is basically a partnership. Profits made by the partnership are passed through to the partners. If you partner is bought out as of now, he shares in the profits up to the date he leaves. So if he leaves as of now, he will receive profits up to today but will not participate in future profits. So as of today he if you look at the capital accounts of the two members, they each have $75,000 to total $150,000.

 

If you pay your partner $75,000 he is getting his share of the profits. He is taxed on those profits at ordinary rates. You have agreed to pay him an additional $25,000 over his profits share. When he is paid his $75,000 his capital account went from $75,000 to $0. That means his tax basis in the LLC is now $0. When you pay him the additional $25,000 you are paying him for his interest in the LLC which valued at more than the profits made to that date. This extra $25,000 is a payment for the membership interest and is considered a capital gain. Capital gains are taxed at a lower tax rate than ordinary income. So he will pay capital gains tax (about 15% currently) on the $25,000.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer: replied 6 years ago.
Ok, but when I will fill out the form 1065 in january 2011, how will I separate the income from january -> august and august -> december ?
I don't understand how is that possible without making a new business structure to separate the income of before and after.

You do not need a new business structure. What happens is that on the K-1 you issue income prior to the departure is split equally between. After the departure all income is allocated to you. So if by the end of the year the total made is $200,000, $75,000 is allocated to your partner and $125,000 is allocated to you.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

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