Business & farm

In reading through the facts and comments:

• Just so you understand, for tax purposes your LLC is technically owned by two individuals.  This is due to the fact, that a SMLLC is a disregarded entity for tax purpose; unless an election is made to treat it as an association.
• Based on bullet 1, you don't have a "holding company".  What you are describing as a holding company is "you" for tax purposes.
• Your terminology is not real clear.  You note a "prospective business partner" and then you go on to indicate that you already have an LLC with this individual. 
  • So are you saying that your partner in your LLC has another business that you want to own as well?
• As I am reading through the facts, there can never be a handshake agreement for all parties protection.  Any agreement reached needs to be in writing.
• If I am reading this correctly, and I asked for clarification in bullet 3, you can't structure this as if you are buying the business and then act as if it is owned by the LLC and split the profits 50/50.
• One way this works is if you buy into the "new" business and then you now have a second LLC.
  • This gets complicated as you will most likely have to deal with step up in basis (Section 754) and then maybe built-in gain (Section 704(c)).  Both of these code sections can get complicated and require special bookkeeping and tax allocations.
• The other way is for the current LLC to acquire the business.
  • In this case it gets even more complicated as there will be step up for you but not for your other partner as he won't get step up on assets that he already owned.
• The other issue that hasn't been mentioned is how you arrived at the purchase price.
  • Typically, at least in the acquisitions I have been involved in, the buyer needs to perform some type of business valuation; whether that be based on profitability and factoring in some multiplication factor or based on assets being acquired.
• Honestly, the comments above are only the tip of the iceberg and this question is really beyond the scope of a forum such as this.  There are too many additional facts, scenarios, other questions that are best done through a one on one discussion with a tax professional.  Unfortunately, in the tax world, the actual $$ involved in a transaction such as this, don't make the tax issues any easier.  It's just smaller numbers, but from the IRS' perspective getting the correct tax result is the same.
• Additionally, in looking at the facts, you definitely need to be cognizant of some issues associated with the business you are looking to acquire.  A business paying out cash and no W-2 or 1099 is an open book for significant tax issues and penalties.  This just reinforces that the agreement needs to be in writing that you are buying assets.  This issue in of itself would give me pause, but I could most likely get over it in some type of an asset acquisition structure.
• You need to make an appointment with a tax professional.  Don't be penny wise and pound foolish.  The tax world can be cruel if not careful.