Allocating Member (Partner) loan liability to LLC?

[jchait]

Our LLC has 3 members. Capital contributions / ownership is 75,15,10% for Partners 1,2,3 respectively.

Partner 1 loans $100,000 to the LLC with 2% interest.  No payments have been made towards this loan during the year, so the principal liability at 12/31 remains $100K.

This, I believe is a recourse  liability because it was made by a partner. Is Partner 1 to be allocated 100% of the recourse liability since he is the "partner at risk"?  Or, are partners 2 & 3 allocated their respective pcts (15 & 10) of the liability on the K-1s OR are partners 1 & 2 allocated ONLY their maximum amount at risk - being their total capital contribution?

I hope I explained the facts clearly,  Any help would be greatly appreciated.

[PatriciaV]

No, the liability would be allocated to all partners based on their percentage interests in the partnership.
[A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.]

By definition, a partnership liability is a recourse liability to the extent a partner or related person bears the economic risk of loss for the liability. In other words, if the partnership were unable to pay the creditor, the extent to which a partner would be obligated to pay the debt from personal funds, or make a contribution to the partnership if the partnership were constructively liquidated.

The source of the funds that created the liability is immaterial to how the partnership allocates that liability. Also note that in a partnership, the partners are liable for repayment of any loan, even if the partnership has insufficient funds to do so. In that case, all partners would be required to make additional pro-rata capital contributions to cover the loan repayment.

See IRS Pub 541 - Partner's share of recourse liabilities for more info.

[jchait]

How does this square with the following taken from the section you referenced?   :

IRS Pub 541 - Partner's share of recourse liabilities 

"

Limited partner.

A limited partner generally has no obligation to contribute additional capital to the partnership and therefore doesn't have an economic risk of loss in partnership recourse liabilities. Thus, absent some other factor, such as the guarantee of a partnership liability by the limited partner or the limited partner making the loan to the partnership, a limited partner generally doesn't have a share of partnership recourse liabilities."

[PatriciaV]

Do you have a general partner in this company? If so, then only the general partner is liable for the recourse debt. In this case, the entire amount would be allocated to the general partner.

Do your LLC formation documents cover loans from partners? Most do, and specify how the loans will be allocated and repaid. You may wish to discuss this issue with the attorney who drafted those documents for your company.