Originally Posted by JABSPD
What are the tax implications of transferring part of an LLC interest to a spouse (in NYS)? Currently father and 2 sons are the members.
I guess it depends. Assignment of interest in an LLC is a topic usually covered in the LLC’s operating agreement.so aslongas there is a provision in the agreement about LLC interest assignment, you must follow whatever the listed requirements are. If your LLC does not have an operating agreement or if the operating agreement is silent on the issue, you must apply your state’s default rules. Unfortunately, state rules vary.so,paradoxically, you may transfer (either by selling or freely assigning) your LLC membership interest to another person unless the operating agreement specifically prohibits you from doing so. In general the IRS treats co-owned LLCs as partnerships for tax purposes. co-owned LLCs do not pay taxes on business income; instead, the LLC owners each pay taxes on their share of the profits on their personal income tax returns (with Schedule E attached). Even if the state doesn't require it, the IRS may expect you to have an annual meeting and keep minutes, since you've elected to be taxed as a corporation. Each LLC member's share of profits and losses, called a distributive share, should be set out in the LLC operating agreement.however, generally, transfers of property to a spouse do not result in gains or losses for income tax purposes. The basis of property to the receiving spouse is generally the same as the adjusted basis for the spouse transferring the property.
Note #1; you need legal counsel in order to properly take care of the documentation requirements including the share ownership records.Since spouses are allowed unlimited "gifts" between them, there are no gift tax considerations, however, based upon the FMV of the shares, consideration should be given to the estate plan for both(QTIP case).
Before you begin the sale/transfer of your LLC share, you needs to consult your state’s laws. If you cannot find the appropriate statute for your state or do not understand how the rule applies to your situation, contact your Secretary of State or a licensed business attorney.
Note#2; as you can see, when members' distributive shares are divvied up, the IRS treats each LLC member as though the member receives his or her entire distributive share each year. This means that each LLC member must pay taxes on his or her whole distributive share, whether or not the LLC actually distributes all (or any of) the money to the members. The practical significance of this IRS rule is that, even if LLC members need to leave profits in the LLC , for instance, to buy inventory or expand the business , each LLC member is liable for income tax on his or her rightful share of that money.