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.
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.
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.
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