Going along with my previous question(s) concerning LLC ownership
interest and capital accounts...
Please provide example effects of how the given event would impact the
two members' membership interest and balance of capital account (their
adjusted basis, if I'm reading right?). Assume that the distribution
of each event is based on the percentage of membership interest held.
A total of 200 LLC units has been authorized. Member A has paid $750
for 75 units, and Member B has paid $250 for 25 units.
1) The first year, the company operates at a net loss, with $1000
revenue and $1500 in liabilities (for loss of $500). How does this
loss, which I assume is charged back to the members, affect the
capital accounts of each Member, and their membership interest (in LLC
units) in any way?
2) The next year, the company pulls a net profit of $1500. $1000 of
this profit the two members elect to distribute to themselves. Again,
how does this affect their capital accounts and membership interest
(in LLC units)?
3) The company sells off a computer server it no longer uses. The
computer was originally valued at $1000, and has been sold for $300.
Show how this money is distributed amongst the members, affecting
their capital accounts and membership interest (in LLC units).
I'm basically trying to run through scenarios of each of the three
major actions to affect a member's capital account, and possibly their
percent membership of the company. If you can think of any other major
actions, throw in examples of those too, please.
Thanks!
--Scott |
Clarification of Question by
sbalmos-ga
on
08 Jul 2004 18:04 PDT
Auggh crud... Typo. It's 2000 units initially authorized, not 200.
Also, what happens when a member's capital account is, through
operating losses or whatever, reduced to $0? Are they effectively
forced out of ownership, forced to be bought out, ???
|
Hello again.
My answer here is based on the principles summarized on two websites:
http://www.1065accountant.com/basis.htm
and
http://bus-web.ad.uab.edu/studentdrive/AC%20452-552/Notes/Chap22Part1.doc
1. Initial basis 750 and 250 = 1,000
- Partner?s Share of $500 Loss
Basis is now 375 and 125 = 500
Capital accounts being 75%/25% throughout, they are also $375/125
2. $1,500 profit; $1,000 distribution
+Partner?s Share of income (+1,500)
- Withdrawals (-1,000)
Basis is now 750 and 250 = 1,000
Likewise capital accounts because the partnership has 1,000 of equity.
3. Partnership had purchased an asset for the 1,000 (assume no
depreciation) and sold it for $300
- Partner?s Share of $700 Loss
Basis is now $225 and $75 = $300
Again, capital accounts being 75%/25% throughout, we can see that
capital accounts are also $225/$75
That's it!
Do read through the two websites cited above, and let me know if they
give rise to further questions.
Search terms used:
"capital account" partnership basis
Thanks again,
Richard-ga |
Request for Answer Clarification by
sbalmos-ga
on
08 Jul 2004 20:25 PDT
Hi Richard,
Mostly clear... I was reading the 1065accountant document earlier
today. So there really is no such thing as a dividend payment in an
LLC, compared to a C corporation. All the "dividend" profit is
disbursed to each member's capital account, and then it's up to the
member themselves to withdraw the money if they want it.
All throughout, the amount of LLC unit ownership, and thus percentage
of everything, is left untouched, as the capital accounts go up and
down. Okay... When it comes time for a member to liquidate, dies, we
buy him out, whatever, the amount they are paid for their LLC units is
... ?
Does the company pay them only the amount left in their capital
account, or some other $x/unit LLC cost (like the arbitrary quarterly
cost that we talked about in the previous question), in addition to
the capital account? Say Member A paid the original $750 for the 75%.
At the end, he's down to $225. Does the LLC pay the $225, the $750, or
some other figure?
That should be my last clarification. Investment accounting is the
only thorn in my side when figuring out how to run the business. :)
Thanks for the patience and the answers!
--Scott
|
Clarification of Answer by
richard-ga
on
08 Jul 2004 21:20 PDT
As noted in my answer, partnership distributions reduce partner basis.
Once the basis gets down to zero then further distributions generate
taxable income.
Likewise, in the year the LLC terminates it will distributes whatever
assets it holds, and to the extent their value exceeds the partner's
basis he will have taxable gain.
So when you ask "Does the LLC pay the $225, the $750, or some other
figure?" the answer is it can only pay out what it has. And although
in your question the capital account stayed in step with the partner's
basis in his LLC interest, that won't always be the case. Anyway,
there's nothing unusual about basis going to zero (although it can't
go below zero because in the case of distributions, basis freezes at
zero and taxable income is triggered instead).
I hope this helps, and thanks again for bringing us your question.
-R
|
Request for Answer Clarification by
sbalmos-ga
on
10 Jul 2004 17:12 PDT
Okay... Been doing more reading... Two cases where I don't think you
understood my last clarification...
When the LLC wraps up, as you state, it makes sense to only pay the
member "what it can". But I meant in the case of the member
voluntarily leaving, the LLC buying them out, or some other event not
connected to the LLC's dissolution. Do we pay the member only the
amount of their capital account, do we pay the value of the LLC units
based on the original purchase value per unit, do we pay the value of
the LLC units based on the current purchase value per unit, etc?
Also, when a member's capital account reaches $0, I understand that
any other loss allocations should be redistributed as if that member
no longer exists? So if we had three members, 1/3 ownership each, and
one member's capital account was reduced to $0, then the remaining two
members take the burden of any losses 50/50. But in the case of profit
distributions, anything that would add money into the accounts, then
we're back to 1/3 each (and then that member would have a positive
value of their account).
I'll go over all this with whoever I hire as the company's accountant,
but having it on record here might be helpful to others. :)
Thanks again!
--Scott
|
Clarification of Answer by
richard-ga
on
10 Jul 2004 18:29 PDT
Hi
For the first item, most people would expect to be paid what their
interest is <worth> when they exit an investment. If there's no
binding contractual arrangement, then what they get paid on exit is a
matter for them to negotiate. Since the company or their partners are
probably the only people who will make them an offer, it tends to be a
buyer's market. That's why closely held business ventures, including
LLCs, often have an operating agreement or owners' agreement that
spells out what happens and at what price in the event of death,
voluntary withdrawal, etc.
Your second item raises a complicated issue. In fact it was what I
was referring to when I mentioned "substantial economic effect"
earlier. You might wish to agree that once a person has zero basis,
losses that would otherwise be his will instead be enjoyed by the
other members who don't have a zero basis. But you can't count on the
IRS accepting that formulation - - the IRS would say that such an
agreement lacks substantial economic effect and was only cooked up for
tax purposes. So they might not allow such an agreement to be
respected for tax purposes.
http://www.irs.gov/pub/irs-pdf/p541.pdf
(page 6)
Good luck with your venture, and let me know what your accountant
thinks of my answer!
Richard-ga
|
,
0 Comments
)