buy Or Sale of an Llc's Member's Interest

Attorney General Texas - buy Or Sale of an Llc's Member's Interest

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The Seller
In general, the sale by a member of a miniature liability firm ("Llc") interest is treated as the sale of an asset cut off and safe bet from the basal assets owned by the Llc. Gain or loss is recognized based upon the inequity between the estimate received for the Llc interest and the tax basis in the Llc interest. A member's tax basis in his or her Llc interest is equal to the estimate of cash the member contributes to the Llc, the basis the member had in any asset contributed, and the member's share of the Llc's debt. A member's tax basis is increased by the member's share of Llc earnings or gains and any further contributions the member makes to the Llc. A member's tax basis is decreased by any cash distributions the member receives, by the basis of asset distributed to the member, and by net losses the member deducts. This gain or loss is determined gain or loss from the sale or change of a capital asset except if the gain is attributable to "unrealized receivables and inventory." The measurement of whether the capital gain or loss would be treated as long-term capital gains (held for more than one year and subject to a 15% tax rate) or short term capital gains (held for shorter than a year and subject to lowly earnings tax rates) will depend on the selling member's holding period. In general, the holding period would begin when the member acquires an interest in the Llc.

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The Purchaser
The buy of a member's interest in an Llc is treated as the buy of an Llc interest cut off and safe bet from the buy of the basal assets of the Llc.

The buy of an Llc interest requires that the buyer allocate the whole buy price to the buy of the interest. The tax basis of the purchasing member's interest is determined under the basis provisions of the Internal earnings Code and will be generally be the cost of the interest. The purchase, however, does not influence the tax basis of the assets already owned by the Llc.  Thus, the purchasing member may be required to recognize a gain if there are appreciated assets owned by the Llc which are sold after the buyer becomes a member.

There is a provision in the Internal earnings Code, Section 754, that allows the purchaser to adjust the proportionate share of the tax basis of the assets owned by the Llc  so that purchasing member can adjust his or her basis of the Llc assets to reflect the buy price paid for the Llc interest. The basis adjustment affects only the purchasing member and not the other members of the Llc. The Internal earnings Code Section 754 choosing is an optional provision.

Remaining Members
The sale by one of the members may or may not influence the remaining members. The sale by a member can influence the Llc and the remaining members if the sale causes the Llc to terminate. If 50% or more of the total interest in the Llc's capital and profits are sold or exchanged, the Llc will be deemed to be complete for tax purposes only. If the Llc is not terminated, the remaining members are not affected for tax purposes by the sale of an Llc interest.

Disclaimer: The data provided herein is not legal advice, but a general summary and should not be construed as legal advice.

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