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Level 1

Exiting member from multimember LLC

We have an owner who is completely withdrawing from our multimember LLC this week. 
Currently, our ownership structure is as follows:
  1. Alan - 40%
  2. Tina - 20% (me)
  3. Kevin - 40% (withdrawing member)
We want to transition all of Kevin's interest in the company to Alan effective this week. 
A few questions:
  1. How should I proceed with paying Kevin out his share of the profit to date? Currently I have Owner Investment accounts for each of us that sum to "Owner Investment". I have credited and debited this account with our contributions to the business and our repaid expenses back to ourselves. And to date, we have only repaid expenses that each of us have personally contributed. We have not taken any draws on profit as we just became "profitable" a month ago.
  2. Is there anything I need to do in Quickbooks to show that he is no longer an owner? I've never closed accounts and not sure if this will mess with our year-end reporting.
  3. We have a potential replacement partner in mind, but we would like to wrap up any loose ends with Kevin before bringing on an additional partner. How would we go about adding this 3rd partner assuming we need to do that before the end of 2020?

I can see how this would get complicated from a tax standpoint because I would think the 3rd partner shouldn't be responsible for profits made before he was partner, and likewise Kevin shouldn't be responsible for taxes owed on profits made after his departure.


This is where I need help since I'm new to owning a small business and all the nuances that go along with it!



2 Comments 2
Community Champion

Exiting member from multimember LLC

You are changing the LLC structure and operating agreements whether you realize it or not. Check with your CPA and attorney.  You might need to close the books for a short fiscal year. Or not. At a minimum you need to calculate the Nnual to date of transfer what the pass through on K-1 for Kevin would be, 


Other than that you only track members in QB for their equity, the pass through split on the K1 is essentially off the books and after the fact of profit hitting retained earnings. Only if your operating agreement calls for payout of profit in cash do you do so. Cash paid to members is simply distribution of equity, an advance on earnings to be sure, and a managing member can receive guaranteed payments for work performed. 


Outside of QB, Alan would stroke a check to Kevin for Kevin's equity value on date of transfer. Do not use company funds



Level 15

Exiting member from multimember LLC

Well you are 100% correct in the tax liabilities for the partners.

Removing and adding a partner means amending the partnership registration with the state too.

Assuming There is nothing more than Kevin's equity (no draws or investments to clear) edit his equity account to show the ending date that he is with the company. Unfortunately QB has no function to accomplish what you are needing to do so it is going to be a pain.


Kevins equity is a value that has to be paid, who is paying it? You say transition Kevins equity to Alan, but does that mean Alan is paying Kevin personally?


You can run a P&L as of the date he leaves the company, that will show net profit for his period of time with the company. Calculate his share of that profit (or loss) and journal that amount from retained earnings (net income) to his equity account. Now someone has to pay that amount to Kevin. Paying Kevin will zero out his equity account. If Alan pays the amount out, then use Alan's equity investment account as the source account for the payment (personal funds). That will increase Alan's equity account by the amount paid.


Adding a partner is much easier, the new partner deposits funds to the business bank account and uses the new partners equity account as the source account for the deposit. Adding funds will change everyones % of equity, that is unavoidable. IMO best to wait for the new year to take on a partner.

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