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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
Partner 2: wires $50k to LLC
Property Purchase - LLC wires $75k to buy property
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
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.
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:
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.
LLC is not a business type, it is alegal dodge that protects your personal assets in the event a law suit against the company goes against you. From what you say you are a sole proprietor for taxes and that is what counts.
A sole proprietor can NOT have additional equity partners/investors. So the basis for your question is illogical.https://yourbusiness.azcentral.com/sole-proprietorships-stockholders-13349.html
Your equity partners need to be changed to liability accounts, but doing that means you owe them the money. And the IRS says you must pay interest on the loan, Applicable Federal Rate is what it is called, google it.
Knowing that there is more than one partner should have clearly shown that this is not a sole proprietor thus the basis for my question is very logical. It is taxed as a partnership, but even if the LLC was taxed as an S-Corp, the question would be the same. The income passes through via K1 to the partners. It is not a single member, disregarded entity that is taxed as a sole proprietorship. Thanks for your quick response.
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