LLC members contribution

[JON]

Here I am preparing a 1065. 5 members the agreemnt says each were to contribute $500. Here are their actual contributions:
A $ 100,000
B 77,000
C 70,000
D 33,000
E 0
---------------
$ 280,000

The money was invested in 3 LLC interests (2 trailer home parks and a real estate business). They are minority owners in all investments.

The two who put the most money in said the orgianl deal is still good-it should be 20% ownership of capital and profit and loss sharing. How to handle show advances from the members for the excess over $500 and subrcription due from member for his $500?

They said when money becomes available first investments will be paid back and any excess-profits will be split 20% a piece.

They do not material participate in realty operation or trailer parks. They all are realtors.

What to do?

[Greenbriar]

Get legal advice

I would advise them to see the attorney to review their operating agreement and advise on the distribution formula; i.e. how much or what percentage each partner is entitled to per the op agreement, then I'd deal with the accounting and tax. Just a thought.

[Corduroy Frog]

Loans

Good analysis, Greenbriar, but sad to say, the distorted structure presented by Jon is typical of what comes out of attorney offices. I wouldn't be surprised if they have already consulted an attorney -- and in their defense, they could have laid out good articles of co-partnership, and then the principals not observed it.

I think we have to consider setting up "Loans to Partners" in the accounts. The client has indicated this is the case. Two big problems: 1)one of the partners hasn't paid in his $500, and 2)some of the other partners have whopping amounts which are not likely to be paid back anytime soon.

There is a big danger that IRS could reclassify these large excesses as "capital contributions" instead of loans if the amounts are not paid back soon. Their position is strengthened considerably if there are not formal loan documents in existence (which is what I suspect is the case). The "capital contributions" could be designated as "excess paid-in-capital" without altering the 20% agreement to share profits and losses.