I had a general partnership LLC go bad, where to make a long story short my partner lost interest from the get go and has now agreed to leave two years later.
I want to give the business a real shot. I'd be investing my own money in creating content to run ads, but I don't want to do this if him leaving costs me money. Taking on the business already feels risky enough even though it's what I want to do. I don’t want to continue the business if it’s a tax burden to me for him to leave. My worry has been that his investment loss would be considered my gain. I recently met with a lawyer and he found that Revenue Ruling 99-6 would apply to our situation.
I’m wondering if anyone can confirm that this is the correct tax procedure. The way the lawyer explained it to me is that removing my partner causes the LLC to be dissolved whereby for tax purposes we are treated as if 50% of the assets were just distributed to both of us. After the distribution I have then been considered to have “purchased” my partner’s share (he has requested 144 units of the product to walk away). So my partner will be taxed on half of the partnership when I close the books after he signs even though he’s walking away with only 144 units of product. I don’t really understand where that leaves me though.
Honestly I barely understand this whole thing and unfortunately I can’t afford a CPA. If anyone could chime in with confirmation this advice is correct, or their own advice it would be hugely appreciated. I'm also wondering what forms I would need to fill out to correctly report all of this to the IRS. Below I’ve put some relevant numbers if it helps.
My original investment: $19,690
My partner’s investment: $18,098
I have taken a $8k loss so far (tax years 2016 and 2017)
He has taken a $8k loss so far (tax years 2016 and 2017)
Our gross profit in 2017 was $649
The business has about $1000 in the bank currently
The starting value of our 2018 inventory was reported as $18,000 on taxes
He wants 144 units of product which have the raw cost value of $1,931 (retail would be much higher, but that is what they cost to make)
The business has no debt