I have a single purpose LLC with multiple equity partners. The sole purpose of the LLC is to own real estate. There are three possible situations that I would like help addressing. This is a simple example.
Initial Transactions
Partner 1: wires $50k to LLC
- Debit: $50k to Checking Account
- Credit: $50k to Equity Account for Partner 1
Partner 2: wires $50k to LLC
- Debit: $50k to Checking Account
- Credit: $50k to Equity Account for Partner 2
Property Purchase - LLC wires $75k to buy property
- Debit: $75k to Fixed Asset Account
- Credit: $75k to Checking Account
To avoid drawing this out more, after purchase of the property, the LLC spent an additional $25k on expenses resulting in a $0 Checking Account balance.
Property Sale - Property sells for $150k
- Debit: $150k to Checking Account
- Credit: $75k to Fixed Asset Account (zeroing out this account)
- Credit: $75k to Capital Gain Income
This is where there are three possible situations come up.
OPTION 1
Wind Up and Close LLC - disperse all bank proceeds to 50/50 equity partners
Write $75k check to Partner 1 & Partner 2
When you Write Check in Quickbooks, the Pay to the Order Of must be a Vendor so I have an equity account for each partner AND a vendor account for each partner.
- Pay to the order of Partner 1 (Vendor)
- Account: Partner 1 (Equity)
The above structure results in a -$25k balance in the equity account. The P&L will show $75k in Gross Capital Gain Income, $25k in Expenses, and $50k in Net Capital Gain Income. Is this correct or am I supposed to allocate the income somehow to $0 out the Equity Account? If so, how exactly am I supposed to do this?
OPTION 2
Wind Up and Close LLC - disperse all bank proceeds to 50/50 equity partners
Partner 1 is the Manager and gets a bonus manager split.
Write $85k check to Partner 1 & $65k check to Partner 2
Everything here is the same as OPTION 1 except the end result would show Partner 1 with a -$35k Equity Account and Partner with a -$15k Equity Account. The P&L would be identical. Is this correct or am I supposed to allocate the income somehow to $0 out the Equity Account? If so, how exactly am I supposed to do this? How would the extra manager split affect this structure?
OPTION 3
Keep LLC as an ongoing entity for future investments with partner changes
There are many situations that could happen here, but I care more about the structure of this. Possible situations could be:
- One partner leaves and a new partner comes in
- A new partner/partners is added
If one partner leaves and a new partner is added, we would be forced to $0 out the departing partners equity account. That seems like it would be required. The departing partner would take his profit and leave. If a new partner is added, it would also change the percentages and would also require us to $0 out the equity. It seems like zeroing out the equity account is going to be required in all situations, so what would I do differently here than what I would be doing in Option 1 or Option 2?
Thanks in advance for your help.
