LLC change owner - debt converted to equity

[KJ Judd]

Single member LLC's owner is going through a divorce. Owner's father loaned LLC money (written note, adequate interest rate). My client (LLC owner) e-mailed me that he is going to convert the father's debt to equity and father will take over the business. My client (son) will no longer own or operate business.

I treat this as a sale for the amount of outstanding debt, correct??

[OldJack]

Might be true except you mentioned a divorce in progress which means this may simply be a transfer to a relative to dodge ownership of the business and property settlement. It may not be a sale at all and since it is to father it might have to be a sale considered at FMV that is greater than the debt. More facts have to be cleared to meet your satisfaction before judgment.

[jainen]

how the divorce court will treat this

>>you mentioned a divorce in progress<<

Do you suppose the way the father-in-law imposed himself and controlled the family business had anything to do with why the marriage broke up?

Well, anyway, I agree with Old Jack again (it's been happening more & more lately). Before you can fill out the tax return, you need to find out how the divorce court will treat this.

[lbbwest]

It could even be worse.

I am not an attorney, however I have done quite a bit of divorce work in Michigan. (I don't know your state.) That transaction could be considered "fraud upon the court." Unless you want to get into a long drawn out and very expensive battle with attorneys and accountants try to come up with a realistic dollar value to cash her out.

In other words after tooting my own horn, I agree with OldJack & jainen, again. lbb

[OldJack]

Well... In my state of Missouri a self employed person's business assets are not considered a part of the assets to distribute under a divorce. ie: a doctor, lawyer, CPA, etc., gets to keep the office and equipment without it being a factor in the settlement.

Its not right but thats the way it was 5 years ago when my daughter divorced the doctor. I screamed and hollered to my lawyer about the million dollar office to deaf ears. They did show me the law section. Well.. I think my screaming did make the other side a little nervous and resulted in a quicker settlement. Some things in life just are not fair.

[KJ Judd]

Wisconsin is a marital property state - so each is deemed to own half of all assets acquired after the marriage. In this case, both spouses work in the business. But because WI is a marital property state it's still considered to be a SMLLC.

We still need to set up a date to meet, but I wanted to have some background before the meeting. As always, thanks for your input!