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Old 04-02-2015, 04:11 PM
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Question Need advice on sale of interest in LLC partnership

I formed a LLC partnership with 3 other partners in 2012. We have an operating agreement specifying our shares.

Let us say I brought cash as capital: $40 (not real numbers)
Year 2012, we reported loss, and my allocation was ($6)
Year 2013, we reported profit, and my allocation was $4
Year 2014, we have a profit (still not reported), and my allocation would be $8 - assuming the numbers prepared by the other partner are correct.

No distributions have been made so far. I was active partner in 2012, so I claimed the loss in my personal tax return. I also paid tax on the profit allocation for 2013.

I sold my interest in Sep 2014. Tax Year is calendar year.

Per the above numbers. my ending capital or adjusted basis would be $40-$6+$4+$8 = $46.

I withdrew $40 at the time of my exit in Sep 2014.

Now the remaining partner wants to issue me the K-1 for 2014 for $8, which is fine with me, however he is not willing to distribute the remainder of my ending capital, which is $46-$40 = $6.

It seems that he is forcing me to pay tax on the $8 profit allocation while wanting to keep my capital of $6.

What recourse do I have ? I am happy to clarify further, but please somebody give me advice here. I have tried calling several CPAs in my region, but nobody has the time right now with the 15-Apr deadline looming large.

Thanks in advance.



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Old 04-02-2015, 05:44 PM
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I sold my interest in Sep 2014. Tax Year is calendar year.

Per the above numbers. my ending capital or adjusted basis would be $40-$6+$4+$8 = $46.=====>>>>>>>>>>>>>>>Correct; your partnership capital account is an equity account in the accounting records of a partnership. It contains; Initial and subsequent contributions by you to the PS, in the form of either cash or the market value of other types of assets plus Profits and minus losses earned by the business, and allocated to the partners based on the provisions of the partnership agreement
Minus Distributions to the partners.there are two different, contemporaneously operating measurements exist to value the interest.Specifically, you, as a partner , in the PS(or a member of a limited liability company treated as a partnership for tax purpose) have both an “outside basis,” measuring the adjusted basis of the partnership interest you hold, and a “capital account,” reflecting your equity investment in the PS. A partner’s capital account is substantially different from your outside basis in the PS interest, and the two concepts should not be confused. There are similarities and differences between a partner’s outside basis and capital account:

Outside Basis Capital Account
Contributions to Partnership Increase outside basis and capital account. Distributions Decrease outside basis and capital account. Distributive Share of Income and (Loss) Respectively increase and (decrease) outside basis and capital account.
Book Gains /Book Losses; Adjustments to book value of partnership property do not affect your outside basis. For example, for purposes of computing your outside basis contributing property to a partnership, your outside basis is increased by your basis in the contributed property regardless of its actual value. your capital account is often increased or decreased by adjustments to book value of partnership property. For example, for purposes of computing the capital account of a partner contributing property to a partnership, the initial book value of contributed property must be its fair market value at the time of contribution, regardless of whether this value differs from the basis of the property.
any increase or decrease in your allocable share of partnership liabilities will cause the outside basis of your partnership interest to increase or decrease. your capital account is not increased or decreased by partnership liabilities.

In actuality, there are two different kinds of basis in a partnership: outside basis and inside basis. Inside basis reflects the adjusted basis of assets held by the PS. Similarly, PS also usually maintain two different kinds of capital accounts – one that is determined by reference to the financial accounting method used by the partnership, and another that is used for tax allocation purposes . The two types of capital accounts are often referred to as “book capital accounts” and “tax capital accounts.” Book capital accounts reflect contributed property at its FMV at the time of contribution, whereas tax capital accounts reflect such property at its tax basis.

I withdrew $40 at the time of my exit in Sep 2014. Now the remaining partner wants to issue me the K-1 for 2014 for $8, which is fine with me,=====>correct; in general, the sch K-1 is prepared by the PS to distribute to you , a partner/member, to outline your portion of the income, loss, or deductions. You use the data on the form to fill out portions of your personal tax return of 1040.

however he is not willing to distribute the remainder of my ending capital, which is $46-$40 = $6. It seems that he is forcing me to pay tax on the $8 profit allocation while wanting to keep my capital of $6.What recourse do I have ? ======>>Needless to say , I guess basically, no body k ows; you need to be based on PS agreement provisions; aslongas you and your partners don't spell out your rights and responsibilities in a written partnership agreement, you'll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. In addition, without a written agreement saying otherwise, your state's laws will control many aspects of your business. A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits or losses each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves, and other important guidelines or etc. your partnership agreement usually includes allocation of PS profits/ losses, and draws,i.e., how profits and losses be allocated in proportion to a partner's percentage interest in the business ; each partner be entitled to a regular draw ,a withdrawal of allocated profits from the business or will all profits be distributed at the end of each year; You and your partners may have different financial needs and different ideas about how the money should be divided up and distributed, so this is an area to which you should pay particular attention.



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Old 04-02-2015, 06:20 PM
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Dear Wnhough,
Thank you for your detailed response.

I would like to provide further details regarding the below:
however he is not willing to distribute the remainder of my ending capital, which is $46-$40 = $6. It seems that he is forcing me to pay tax on the $8 profit allocation while wanting to keep my capital of $6.What recourse do I have ? ======>>Needless to say , I guess basically, no body k ows; you need to be based on PS agreement provisions;

At the time of exit in Sep 2014, the 3 exiting partners and the 1 remaining partner created an addendum to the existing Operating Agreement, where all 4 of us signed in agreement that the exiting partners would release rights to receive distributions, but in return will not incur any tax liability for the year 2014.

In essence, the intent was to say that as an exiting partner, if I am being allocated my share of profits, then I also need the cash distribution to back it up. Or, don't pay me $8, but also don't allocate profits to my share. Which means, my adjusted capital remains at $38 and I pay long term capital gains on my withdrawals $40-$38 = $2 (which is okay).

Please advise if the above clause will prevail. Thank you again !!!



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Old 04-02-2015, 07:17 PM
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Quote:
Originally Posted by mechmonk View Post
.
Partnerships are unique business relationships that don't require a written agreement. However, it's always a good idea to have such a document . what happens when a partner is disassociated from the partnership should be addressed in the partnership agreement;so, the distribution of shares should be clearly described in the Operating Agreement or in a separate document usually a profit sharing agreement or profit share contract that has been incorporated into the Operating Agreement; The departure of a partner, for example, might result in an automatic dissolution of the partnership and forced distribution of assets and profits. a good partnership agreement will include a “buy-sell” provision to address what happens to the partnership in the event of a partner’s resignation , retirement or etc. A buy-sell agreement is a binding contract between the partners that defines what events will trigger a buyout; The price that is to be paid for the disassociating partner’s interest in the business, and Who can buy the dis-associating partner’s interest . I guess you need to talk to your partners.



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