Question about LLC member capital accounts.

What is the name of your state (only U.S. law)? California

Hi Guys,
I'm new to this forum but have found lots of good advice and information already!

I have a question regarding a member-managed LLC and the individual member capital accounts (contributed assets).

Background: Three of us are considering merging our individual businesses (all currently sole proprietorships) into one entity under a California LLC. Our current businesses share the same customer base but do not compete with each other's products/services. Economy of scale, spreading the management workload and singular location are the main driving force behind this consideration. Our individual products/services are synergistically compatible. We are all mature business owners/operators and have known each other well for over 10 years. Each of us regularly refers our customers to the other.

My understanding of an LLC member's capital account is that it represents assets contributed to the LLC and forms the (tax) basis of each member's investment in the new entity. And, that the actual amounts in each member capital account do not have to be exactly equal in order for the members to own shares equally in the LLC.

Is this correct?

I appreciate and thank you in advance, for your answers.

Tom

The capital accounts are not the key, your investment is. While not strictly true, inside basis can be different from outside basis.

However there are tests having to do with economic reality. While the investment does not have to be exactly the same for equal shares, you have to make sure the agreement reflects the reality of the situation. What the main concern is are transfers to other persons without there being a gift or income.

Tranquility - I truly mean no offence but I am struck with the thought in reading your response that it was meant to impress, rather than to enlighten. It didn't do either.

Can you try again in simple terms?

Thanks,

Tom_P said:

Tranquility - I truly mean no offence but I am struck with the thought in reading your response that it was meant to impress, rather than to enlighten. It didn't do either.

Can you try again in simple terms?

Thanks,

Click to expand...

It would be very difficult to put in simple terms without having all of your information in front of someone. I would really recommend that you sit down with a CPA and an attorney to get more information on what you are contemplating doing.

Inside/outside basis is very complicated. However the main message that Tranq is giving you is that you need a well written agreement that reflects the true reality of what each of you are contributing.

Here is an article that gives an overview of inside/outside basis:

Basis, an Overview of Basic Concepts

Tranquility - I truly mean no offence but I am struck with the thought in reading your response that it was meant to impress, rather than to enlighten. It didn't do either.

Click to expand...

Here I thought a person using the term "synergystically" could handle shorter words. I'll try again.

The capital accounts are not the key, your investment is. While not strictly true, inside basis can be different from outside basis.

Click to expand...

In your question, you asked about capital account. That was not the right question.

However there are tests having to do with economic reality.

Click to expand...

Google [partnership test "economic reality"].

While the investment does not have to be exactly the same for equal shares, you have to make sure the agreement reflects the reality of the situation.

Click to expand...

That's the "simple term" for what you'll find through the above research.

What the main concern is are transfers to other persons without there being a gift or income.

Click to expand...

That's the reason for the law. It helps guide an honest man on what he can and can't do without getting into all the details.

Thanks guys**************.
I appreciate the information though it wasn't quite as simple of a question as I thought. Or should I say, the question was simple but the correct answer was not! LOL**************.. I did find the information link on inside/outside basis helpful.

We do have both a CPA and an attorney advising us. But I have found over the 30 plus years of being a business owner that it is best to have a general understanding of things before hearing advice of professionals. Whether it be my doctor, lawyer, CPA or dentist.....we humans make mistakes and sometimes having just a general knowledge of something helps to minimize the impact of those mistakes.

So that's what I was doing here, asking about things I wasn't clear about and trying to get my background/spade work done.

Thank you for your insight,

Tom