Here is the situation. I invested in a real estate venture (in Michigan) with two other partners. One partner and I contributed 50% of the funding each (call me A and him B), and the other partner is contributing services (call him S). We purchased a house and are rehabbing it. I am currently in the process of setting up an LLC and have some questions.
We did not establish any kind of partnership on paper (though this was the intent from the beginning). S currently holds title to the property (though A and B paid 100% of the costs). So the question is, what needs to be done to set up the LLC correctly?
My plan:
1. Have S quitclaim the property to A and B with an undivided 50% interest each.
2. A and B quitclaim the property to the LLC.
3. Value the property as the total spent on the project by A and B (we have split all costs 50%).
4. A and B each get a 50% capital interest in the LLC, with capital accounts valued at 50% of the number calculated in step 3.
5. S gets a profits interest (for various reasons I won’t go into here, the plan was to split the profits (after paying off the capital accounts) 40% (S) 35% (A) 25% (B).)
Obviously we should have figured this out ahead of time, but we had to close quickly and had to fly by the seat of our pants. Does this plan make sense? Have I missed anything? One question I have is whether quitclaiming the property will incur a tax event, or will it be considered as a reorganization of an existing partnership (if so, should we set up any kind of paperwork for the existing partnership?)?
I would really appreciate any input any of you have.
We did not establish any kind of partnership on paper (though this was the intent from the beginning). S currently holds title to the property (though A and B paid 100% of the costs). So the question is, what needs to be done to set up the LLC correctly?
My plan:
1. Have S quitclaim the property to A and B with an undivided 50% interest each.
2. A and B quitclaim the property to the LLC.
3. Value the property as the total spent on the project by A and B (we have split all costs 50%).
4. A and B each get a 50% capital interest in the LLC, with capital accounts valued at 50% of the number calculated in step 3.
5. S gets a profits interest (for various reasons I won’t go into here, the plan was to split the profits (after paying off the capital accounts) 40% (S) 35% (A) 25% (B).)
Obviously we should have figured this out ahead of time, but we had to close quickly and had to fly by the seat of our pants. Does this plan make sense? Have I missed anything? One question I have is whether quitclaiming the property will incur a tax event, or will it be considered as a reorganization of an existing partnership (if so, should we set up any kind of paperwork for the existing partnership?)?
I would really appreciate any input any of you have.
