Sole Proprietor to bring on a partner

[Jesse]

I have a hair stylist who currently operates out of her home that is going to take on a partner and move into town. They want to buy a bigger building and the partner is going to take care of the books and will not be involved in the cosmetology aspects of the business.

If this transaction takes place 2006, this will be the final year of business for the stylist on her Schedule C so do I treat these assets as a sale to the new p-ship and report any gain or loss on her tax return for 2006? The new p-ship will now depreciate the assets using the FMV rather than the tax basis of the assets.

Or must the assets be transfered and depreciatied using the current tax basis and the built in gain/loss figured in the capital account?

[Unregistered]

Basis

Current adjusted basis for the tax basist and FMV for the book basis.

[veritas]

Also advise your client to bring on new partner in a minority position.

[sea-tax]

Also like Veritas I would advise the client to get a buy out set up because I have found out these type of arrangements tend to go sour in the 5th to 7th year.

Also having one partner control all the bookkeeping and finances is a bad idea. encourage them to slpit the duties or have outside help,namely you!

[Jesse]

In forming the new LLC the plan is to contribute equipment and cash to equalize the capital accounts. For example if FMV of equipment is $3,000 then another $7,000 will add up to $10,000 begining capital for member 1, and member 2 will put in $10,000 cash Now they both start out @ $10,000 each for a total of $20,000.

They went to the lawyer to set up the LLC and have an operating agreement written and his suggestion is to loan the money to the LLC rather than contribute the money. The reason is that a contribution can not be repaid without being subject to FICA tax unless it is an actual loan. The LLC will be taxed as a partnership. Would this be true?

My thoughts are that any guaranteed services would be subject to FICA, however, nontaxable distributions of money can be taken unless the distributions exceed the members adjusted basis in the LLC? Am I missing something?

[JoshinNC]

This is why attorneys practice law and accountants do taxes!

In forming the new LLC the plan is to contribute equipment and cash to equalize the capital accounts. For example if FMV of equipment is $3,000 then another $7,000 will add up to $10,000 begining capital for member 1, and member 2 will put in $10,000 cash Now they both start out @ $10,000 each for a total of $20,000.

They went to the lawyer to set up the LLC and have an operating agreement written and his suggestion is to loan the money to the LLC rather than contribute the money. The reason is that a contribution can not be repaid without being subject to FICA tax unless it is an actual loan. The LLC will be taxed as a partnership. Would this be true?

My thoughts are that any guaranteed services would be subject to FICA, however, nontaxable distributions of money can be taken unless the distributions exceed the members adjusted basis in the LLC? Am I missing something?

Any distribution to the members of the LLC (subject to outside basis) would not be taxable unless they sold the property distributed for more than it's adjusted basis to the parntership. There is no FICA on distributions that are not guaranteed payments.

[Jesse]

Looking for opinions

In forming the new LLC the plan is to contribute equipment and cash to equalize the capital accounts. For example if FMV of equipment is $3,000 then another $7,000 will add up to $10,000 begining capital for member 1, and member 2 will put in $10,000 cash Now they both start out @ $10,000 each for a total of $20,000.

They went to the lawyer to set up the LLC and have an operating agreement written and his suggestion is to loan the money to the LLC rather than contribute the money.

Do you see any advantage or disadvantage to setting up the contributions to the LLC as a loan?