Sale of LLC Interest

[Laura650]

I am so confused. I thought that the person was one member of nine in an LLC than elected to be taxed as a partnership. If he bought out the other 8 members, then the LLC would remain with one member, yes? And the K-1s would reflect the members' contributions and distributions, yes? I am contemplating purchasing a multi- property LLC from two members. I would be a sole member owing the LLC. From what I am reading, my purchase would be an addition to the adjusted basis of the LLC and, thus, the properties and the $$ paid to the exiting members would be a distribution to them? Is this how it is handled because it is a pass through entity? If I have this right, I guess I can decide how to assign th value paid to the individual properties in the LLC, yes? It is very complicated. 

[Carl]

There's no such thing as "elect to be taxed as a partnership". Basically, the only difference between a multi-member LLC and a partnership, is the spelling. Perhaps you meant "taxed as an S-Corp"?
Now if the multi-member LLC elected to be taxed "as an S-corp", that's a different matter. If not, the multi-member LLC ceases to exist and a new single-member LLC is established.

[Opus 17]

An LLC with more than one member is automatically taxed as a partnership, no election needs to be made.

It's not clear from your question if you are buying the LLC or buying out the other members of an LLC that you are already a member of.

[tagteam · Accepted solution]

I can ask Champ @Rick19744 to get involved here, but the original post in this thread was split off from another thread, that was circa 3 years old, and the original question in this thread is well over 2 weeks old (i.e., the OP may no longer be around).

Regardless, more information is definitely needed in order to formulate an accurate and useful response.

[Rick19744 · Accepted solution]

Several thoughts and comments:

• Just to clarify prior post comments, a multi-member LLC (LLC) is by default taxed as a partnership.  So in essence, you have in fact "elected" to be taxed as a partnership, however, no formal election is required; this is just the default as noted.
• Additional facts are definitely needed:
  • Clarification as to whether you are currently a member
  • How many other members are there (just like to know the facts)
  • What does the current LLC hold in the way of assets
  • Is there debt on the books of the LLC
  • Is the LLC cash or accrual method of accounting
• After responding with additional clarification, we can provide some guidance, however, in the end, you need to meet with a tax professional to make sure that this is handled properly for all parties involved.

[Laura650]

Thank you Champ. I am not currently a member. I am looking at buying out the two existing members. 

Two, as far as I know. I have not seen the controlling documents.

All real estate. About 45 SFRs.

Yes, there is debt.

I am not aware of the accounting procedure used for taxes. (Assume you meant accrual or cash for tax reporting purposes??)

[Laura650]

Hi Carl, I was just following the prior discussion. I am not aware of how the LLC is reporting. I always assumed that they were always pass through entities. I am not sure I understand th tax reporting distinctions between Sub S, LLCs, and partnerships. I thought they were all pass throughs and each member reported their share on their own tax report. 

[Laura650]

Hi Opus, Thank you for your response. Sorry to be confusing. I was looking at the post that referred to someone buying out other members. In my case, I am not a member and would be buying the interests of 2 members holding 100% of an existing LLC. 

[Laura650]

Thank you Tagteam. What a wonderful group of people are on this site. I truly appreciate you all. Hopefully, the additional information I provided the others is sufficient. 

[Opus 17]

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@Laura650 wrote:

Hi Opus, Thank you for your response. Sorry to be confusing. I was looking at the post that referred to someone buying out other members. In my case, I am not a member and would be buying the interests of 2 members holding 100% of an existing LLC. 

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Are you sure you should even buy the LLC at all?  You might be better off forming a new LLC and buying the assets of the former LLC.  Then you pay whatever you pay, and their tax return is their problem.  I think you should talk to an attorney before you get too involved. 

[Mike9241 · Accepted solution]

for proper tax treatment you need to know what type of tax entity the LLC is.   for example, buying out their interest in an LLC taxed as an S or C Corp would mean you cannot depreciate any excess of the amount you paid over the tax basis of those properties to the LLC.  if it is LLC is taxed as a partnership that creates its own issues because there cannot be a one person partnership so the LLC partnership terminates.    There are mortgages where we do not know their provisions. however, the lenders may be able to invoke any due on sale clauses. The DOS would likely occur if you were to buy the properties from the LLC  

[Laura650]

Thank you so much for the advice!!

[Laura650]

I will definitely speak with counsel. Thank you!

[Rick19744 · Accepted solution]

Thanks for the additional details:

• There is Revenue Ruling 99-6 that provides some guidance for your potential transaction (assumes the current LLC is taxed as a partnership).
• Based on the Ruling, the existing LLC terminates when you acquire the interest and will file a final tax return.
• As a result, you will now own the assets of the old LLC and you need to determine what structure you want to own those assets; individually, single-member LLC, etc.  This will be a completely new structure requiring filings with your state and also a new federal EIN.
• Since you are not a member of the current LLC, the accounting method question becomes moot.
• Both parties will need to complete form 8594 which provides details on the allocation of the purchase price.
• This is a complicated transaction and I strongly advise you to get a tax professional involved before you consummate the transaction.

[Laura650 · Accepted solution]

Hm, I will definitely hire a professional. But assuming that the LLC is taxed as a partnership and not as a sub-S, I could buy the members' interest with another person, say my daughter, and preserve the partnership filing status. The reason I say all of this is that the 45 properties were purchased at various times over the last 30 years. Most of which were purchased more than 20 years ago. I am in California. I really do not want a transfer of ownership that would trigger a reassessment for property taxes. Under Prop 13 the current property taxes result in a tremendous annual savings. If you think I am somehow wrong on this, I TRULY appreciate any perspective you care to share.

Regarding the loan, I am not concerned about the lender demanding the loan due because membership interests changed. While they probably could (I have not looked at the loan docs yet) it is unlikely if they are receiving payments. That has just been my experience. Once again, any thoughts are appreciated.

I really appreciate all of the thoughts. I cannot begin to tell you how helpful you comments are to me. The comments and suggestions have greatly aided my analysis of the purchase. It is scary, but exciting too. Thank you!!