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Level 1

Single-Member LLC changing to Multi-Member LLC after 2 months - need to value biz for new member?

So, I have a client who started a business as a Single-Member LLC and made a $25 member contribution to the business. The company then received a $25,000 signing bonus for signing on to be an independent contractor for a specific company. They have little to no income or expenses as this point other than that. Fast forward, the second member is coming on after the business has been in existence for about 2 months. (This was the plan all along.)

 

How do I value the business for his buy-in? I don't want him to have 'phantom income' for taxes, but both members (they are brothers) expect to have 50% ownership of both the business and profits. I came in in the midst of this process so has anyone dealt with this before? Does QuickBooks Online have any valuation support? Would you consider a signing bonus profit for valuation purposes? Any help is appreciated. 

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Level 15

Single-Member LLC changing to Multi-Member LLC after 2 months - need to value biz for new member?

If the second member is coming on board, and if he is an employee no problem


Other wise, there is a new business, a partnership (or maybe an s-corporation if that election is desired) with a written partnership agreement registered with the state and the IRS - a new FEIN is also required. LLC does not change this requirement, it is a state only designation.

 

With only two months into a sole proprietorship, if it were me I would create the partnership agreement as of the date the business began. Backdating is iffy and technically wrong though. I do not know if you would run into issues with the state or the IRS for filing the partnership paperwork over two months late.

 

And a sales tax permit issue as a sole proprietor would have to be closed and reopened under the partnership name.

 

I suggest you get with a tax accountant and lay this out for him.

 

From what you say, technically, the first member would close the business, reporting a short tax year and that signing bonus is income.

 

Then the partnership is formed with each member contribution equity.

 

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