Llc

[S T]

Sole Proprietor creates an LLC 2 member (himself and son) The 2nd member which is the son contributes about $500,000 to the LLC. Those funds are used to pay off existing loans in full. The original member's basis of assets minus the liabilities is at a negative of about ($200,000).

My understanding is that when the LLC is created, the original owner is considered to have contributed the basis of business assets to the LLC minus liabilities and the new owner's (son) contribution is cash. It is not a taxable transaction for either party.

So on capital accounts beginning is -0- on each, then capital contributed show a positive for the son contributing the $500,000, but the original owner shows a negative of ($200,000,) is this correct???

Sandy

[Bees Knees]

Basis can never go below zero

No, I don’t think you can do that.

Section 752(b) says: “Any decrease in a partner’s share of the liabilities of a partnership, or any decrease in a partner’s individual liabilities by reason of the assumption by the partnership of such individual liabilities, shall be considered as a distribution of money to the partner by the partnership.”

The Small Business Quickfinder has an example of this on page B-6 under Basis Example. The second example illustrates that the partner’s contribution of property with liabilities that exceed basis produces a taxable gain to the contributing partner, to the extent the liabilities that he is no longer liable for exceed the basis in the asset he is contributing.

Now of course, this is under general partnership rules, where the liability is being assumed by the other general partners. Their basis increases by the liabilities assumed, and the contributing partner’s basis is decreased by the liabilities the other partners assume. However, in an LLC, the other partner does not assume the liabilities of the contributing partner, because liabilities are limited under the limited liability rules.

Even so, that does not change section 752(b) for the contributing partner, because his or her liabilities are still assumed by the partnership in the LLC setting. So even though the liability does not transfer to the other partners (increasing their basis), the excess liabilities will still cause the contributing partner to incur taxable gain treatment. In your example, he has $200,000 of taxable income on the contribution, and his beginning basis starts off at zero.

The capital accounts are another story. I believe for book purposes, you would still show his beginning capital account at negative $200,000, but his beginning basis cannot be below zero. For that matter, I can’t think of any case where someone’s basis can ever go below zero. This is also a good example of why your capital account does not always reflect your basis in the partnership.