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Barrister
Barrister, Attorney
Category: Business Law
Satisfied Customers: 33791
Experience:  15 years practicing attorney, JD, BA, MBA
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should a promissory note to pay for a 20% ownership interest

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should a promissory note to pay for a 20% ownership interest in an LLC be designated as an asset on the books of the LLC? (question for purposes of a divorce business valuation)
Hello,

Thank you for using JA. If the promissory note is owed to the owner/member personally of the LLC, then it is a personal asset of the individual. If it is actually owed to the LLC as some type of contribution to the assets of the LLC, then it should be listed as an asset of the LLC. A promissory note is a “note payable“ from the standpoint of the maker and it is a “note receivable“ from the standpoint of the payee.
A note received is an asset because it becomes a claim against the debtor for the amount due.
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For example, owner sells some percentage of the LLC for $50K with the note being made out to him personally. Then it is his personal asset and would not contribute to the value of any assets in the LLC. But if the owner has the new buyer issue a note to the LLC for $50K, that is an asset of the LLC and increases the value of the LLC assets.
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It boils down to who is the payee of the note.
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Thanks.

Barrister

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Customer: replied 4 years ago.
more info: Mr. X was offered and accepted the right to purchase a 20% interest in LLC by signing a prom note. he pays on the prom note through guaranteed distributions from LLC. he pays income taxes from these distributions and then gives the rest back to LLC and this is applied to the balance due on the prom note. 3 other partners pay on their prom notes in the same manner. I'm trying to argue that the value of Mr. X's interest in LLC should NOT be reduced by the amount due on the prom note. for purposes of divorce settlement.
I understand your goal, but I can't agree with you. For example, if someone owns a house worth $1MM and owes $1MM, there is no equty and essentially zero value since the debt and equity cancel each other out.
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If X owns 20% of the LLC, but his note is equal to 20% of the market value of the LLC, the same outcome occurs. In a property settlement, you would have to come up with the net value of the LLC interest (i.e. value - debt). Presumably his equity would be increasing every year as long as the distributions were larger than the payment and interest on the note. So every year, the net value of the LLC interest would increase, but if it is early on in the purchase agreement, there may be little value now.
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Thanks.

Barrister

.

If you need further help please do not rate 2 stars/faces "Helped a little" or 1 star/face "I expected more". This is considered a negative rating against me.

.

Just reply to me via the “CONTINUE CONVERSATION” or “REPLY” button with the questions you have as I receive no compensation for my efforts for the lowest two ratings.

.

Please keep in mind that I am trying to help you understand and resolve your situation. I don't make the laws, I am just reporting or interpreting them, so the outcome may not be what you had hoped for.

.
Please be patient as I am typically working with several customers at any given time. Some answers take 5 minutes, some 35 minutes. But rest assured, I will get back to you.

.

Please be aware that I am not entering into an attorney client relationship, this is a public forum, and all posts are available for public viewing. There is no duty of confidentiality that attaches to any posts. With that in mind, please do not post any specific information you do not want available for public viewing. The information provided is not a substitute for a local attorney’s legal advice.

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