LLC Units Buyback prior to dissolution - company form & filing needs and how members file

[IS18]

We are closing our company, which is a Multiple Member LLC.   Prior to closing we wish to buy back units from unitholders.  

Do I need to generate, issue, and government file 1099-Bs somehow for the buyback, and if so how do I do this?

Or is this something that is taken care of entirely within the regular K-1s?

[Carl]

Define "units" please. A multimember LLC doesn't have shares in the same sense as a C-Corp or S-Corp. So that can't be it.

[Carl]

Are you referring to those that made capital contributions to the business, in the form of cash or materials maybe?

[Carl]

I was reading your original post to fast, and thinking to fast before. I think I can get a grasp on this now. I'm assuming that in the past a 1065 was filed to report business earnings and owner distributions to the IRS. In the dissolution of this business, was it sold? Is it legally bankrupt? Or is the business just closing down for whatever reason? (state the reason if you can without getting to personal.)

[IS18]

Hello Carl,  

Thank you for the reply.  You are correct that the units are representations of initial contributions.  They have been being tracked via the 1065 each year.

The company is still around but no longer actively doing business and effectively insolvent.   Bankruptcy is a very possible next step, but hopefully avoidable.  We are looking to buy out the non-manager partners as our complex cap table has made the company impossible to sell or attract a White Knight as a means to maybe stay alive, or at least make dissolution and bankruptcy simpler.

[Carl]

Some things stated are obvious, but are stated for completeness and clarity.

If you buyout down to one owner, that forces the dissolution of the partnership into a single member LLC. The paperwork is horrendous for that.

As it stands now, without knowing the details of any partnership agreements I flat out do not recommend you continue to pursue this here in a public forum, or any public setting for that matter. Since that the lowest level Multi-Member LLC's and Partnerships are a "state thing" you will find it more economically feasible to seek professional help on this, and let the business pay for it.

The one thing that sticks out to me is the buyout options. What's in writing? For what's not in writing, was do the rules and laws of your state dictate? Is the buyback of non-managing partners (sometimes referred to as non-controlling owners) something you have to negotiate? Or are terms already spelled out in the partner agreements? I suspect the former, because if terms were already spelled out, you wouldn't be posting here right now.

But the basic rules are, a buyout of a partner involves return of any capital contributions of that partner, along with any profits (or losses) realized at the time of the buyout. Losses of course, will reduce the amount of the invested capital contribution that can be returned. With a loss this gets to be a real problem if a capital contribution is other than cash - such as a physical asset for example. The remaining partners absorb the departing member's share, but at what cost? Maybe the departing member wants their physical asset contribution back, in lieu of the cash value of it? If such physical asset is key to income production, that puts the possibility of bankruptcy on the table pretty much right away.

Overall, as I learn more (and I've really not learned that much about the business at this point) it scares me that you would be seeking help in a public communications media for a situation that may be more complex than you or I realize at this point. So I highly recommend professional help from a licensed attorney or a CPA in your locale that is experienced with dissolution/conversion of multi-member LLCs/Partnerships that have more than one type of owner. (Owner-mangers and owner-non-managers, sometimes referred to as silent partners, are just two types. There are others.)