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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10149
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Two individuals are starting a company as a LLC Partnership.

Customer Question

Two individuals are starting a company as a LLC Partnership. One 2/3 ownership and the other 1/3.They have equipment that is easy to value and add as an asset. The question is about merchandise on hand for resale, and how to bring it in to the partnership so to take advantage of cost of goods sold expense. Do they do a note payable to one owner or what? It is merchandise purchased over the years in anticipation of a buisness endeavor.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Does only one partner own the inventory?

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If so, then yes sell, do a note, whatever so that their contributions match their ownership.

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Remember that they should be drafting a partnership agreement ... WHich lets them assign ownership interest, management rights, splitting of income, loss, capital gains, capital loss, etc., etc., etc., any way they want.

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It's only in the absence of a partnership agreement (NEVER a good idea for a MULTITUDE of reasons) that ownership interests and all of the others rights, responsibilities and duties of care default to state partnership law (and if the state has adopted RUPA ownership is based on capital contribution)

Expert:  Lane replied 1 year ago.

But yes, in terms of generally accepted partnership accounting, the basis of the partnership interest is the basis of the property transferred decreased by the liabilities of the partner ....

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OR the liabilities to which the property transferred by the partner is subject assumed by the partnership and increased by the portion of the liabilities of the partnership assumed by the partner and by any gain recognized

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Then, ...

1) Liabilities Assumed--the partner's profit-and-loss sharing ratio is used to determine the amount of liabilities assumed, and

2) Personal Use Property--if personal use property is transferred to a partnership, the basis of the property transferred is the

lesser of its fair market value or adjusted basis at the date of transfer.

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So they could (1) do an exchange or sale before contributing, (2) one or the other hold a note for the difference (an outside basis issue) OR (3) let the partner contributing (or contributing more) hold the note and have the partnership cary the liability as you mentioned.

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But again, this could all be handled in the operating agreement by stating that A is contributing X and B is contributing Y and ownership will be vested 66 and 2/3 % in A and 33 and 1/3% in B ... you can even do profit's interests (LLC version of stock incentives for corporations) for future performance to guarantee the one contributing more (see this: http://www.gilaberttax.com/2014/01/14/profits-interest-vs-capital-interest/)

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This doesn't HAVE to BE handled as a transaction UNLESS the partners feel there's an inequity there

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And again, as an aside, this is an excellent time to do the operating agreement (REQUIRED in a few states) anyway to avoid all KINDS of forced decisions down the road because they didn't think it out ahead - For example, partner A dies ... Does Partner B really want Partner A's heirs as business partners? (right's of first refusal to buy out)

... What about disability .. what about exit generally (retirement OR one simply wants out) ... what about adding partners... what about special allocations, etc.

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Just a thought ... I've seen MANY a fight that could have been avoided had there been some forethought and an agreement to guide

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