Florida LLC started with my Wife, Aunt is buying in with Capital

[BigWill]

The question I'm running into is as follows

Will+Wife own 50% each of the LLC started in Florida. I will be buying out my parents tangible and intangible assets of their business. My Aunt wants to buy into my LLC to help with Capital to purchase my parents tangible and intangible assets from their business (Operating agreement will state Will 50%, Wife 25%, Aunt 25% after Capital Investment). Aunt will be listed on the amended LLC in the state of Florida. If she invests into the LLC with said Capital will she be taxed if she is simply repaid the Capital invested by the LLC over the next 5 years until Capital is paid off? My assumption would be she gets taxed if she receives any payment over the capital invested? All terms and agreements would be in the Operating Agreement of the LLC with exhibits. Aunt is not looking to "write off" said Capital Investment she is just trying to avoid anyone being "taxed" on the transfer to the LLC and repayment back to her. Aunt is not 100% concerned about being repaid the entire amount mainly only 10% of the amount invested in the next year. 

Thanks in advance for any answers. If you have questions in regards to my question I will answer ASAP. We will be closing the asset agreement tomorrow. 

[tagteam]

This is almost totally dependent upon the agreement, but I am confused as to why this was not structured as debt.

I will page @Rick19744 since I am sure he will have some sage advice.

[BigWill]

Edit: Thank you for your response. 

My Aunt didn't decide to buy in until after the LLC was initially formed with the state, leaving me to amend the the LLC in the state of Florida now after the fact to include her as a member. She is trying to avoid anyone paying taxes on the "debt" or interest as a "loan". She will be helping with the accounting of the business, my wife will be helping with office support, and I will be handling day to day operations. I plan on meeting with a CPA in the coming weeks but this was pretty much an "on the fly" decision. If we push it out another month we would essentially lose $8-10k in profit for that month (billed behind). The assets being acquired are of an already established business (15 years in business). Would we be able to amend the Operating Agreement to state the funds from "Aunt" are of a debt? I just don't want her to pay taxes on repayment of, or payments of said capital investment into the business. Business is a multi member LLC. No S or C corp has been elected therefor is passthrough. 

[Mike9241]

Operating agreement will state Will 50%, Wife 25%, Aunt 25%. 

if that's what the OA states, but profit/loss on the partnership tax return is allocated 50/50 between you and your spouse, an IRS audit could result in it changing everyone's tax return. the aunt could face a tax bill 

to avoid the unpleasant consequences that could result, the money from the Aunt needs to be reflected as debt on all documents including the tax return.   interest needs to be paid on the debt - various IRS code sections. so she will have to pay taxes on the interest.  forgo the interest and there are tax code sections that the IRS could use to impute interest income to your aunt resulting in her facing taxes penalties and interest

also since your aunt is performing services for the LLC, not compensating her for these services could result in wage and tax issues.   spend the money on the CPA so you can get properly informed on your options. 

[Rick19744 · Accepted solution]

My thoughts are as follows:

• First and foremost, this issue is best dealt one on one with a tax professional.  There are just too many questions that need to be addressed and a forum such as this is not conducive to being able to do that efficiently.
• Most problems occur when taxpayers enter into a transaction prior to meeting with a professional.
• When you meet with a tax professional, the following should be discussed:
  • Is this a completely new LLC or an existing and operating LLC that is just expanding?
  • If the LLC already has a business, then there are numerous tax issues that need to be addressed when bringing in a new member.
  • Does your Aunt want to be in the LLC for the long term or is she really just providing funding?
  • Sounds more like your Aunt is just providing funding.  Bringing her in and "paying back her capital" will require disproportionate distributions and lead to allocation issues that go way beyond this forum.  At the end of the day one of two allocations must be met; either income follows distributions or distributions follow income.  Doesn't sound like what you want to do will meet either of those if the goal is to pay back your Aunt's capital infusion.
  • It also sounds as if you need a better understanding of how the LLC tax implications affect each member.  This should be accomplished with a meeting with a tax professional.
  • Are you going to be operating in more than one state?

LLCs taxed as partnerships are complicated, regardless of the size of the business.  Meeting with a tax professional will get you started on the right path and help you understand the tax implications.

[BigWill]

Morning Rick, 

Thanks for the response. I tried to convince my Aunt to do a loan at current April 2022 AFR rates and just pay the taxes on the interest she made, she was trying to avoid me paying interest. I will be going to speak with a CPA next week to iron out the best possible option (which I'm understanding is probably the private loan route with no membership interest in the LLC). Operating in the state of Florida. Appreciate the follow up and time to form a response. 

[Rick19744]

You are welcome.