Transferring member interest and leaving a 50/50 partnership

[choink]

My business partner and I have a service company in ME. We've had disputes ever since we started operations at the beginning of 2013. My partner insisted on being the president, but he hardly fulfilled any duties, let alone presidential. In early 2015, I got fed up with doing way more work and offered to leave the company as an employee and offered my partner to transition my duties. Instead, he hired a lawyer and has been trying to disassociate me, only offering to release from the business loan as compensation, ever since I left. They filed a lawsuit to disassociate me on a bogus accusation of misconduct. I filed for Chapter 7 and received a discharge. The trustee chose no-asset in the business, so I remain a shareholder. The partner is not yet responding to the business court with further action after my automatic stay expired.

The partner made many contributions to the business without doing the actual work on expanding operations. I only had time to build and run the infrastructure of the company and had no expertise or license on the operations side. We could never afford to distribute profits, and I owe taxes for prior years. I just received my long-delayed Schedule K for 2015 and it shows nearly sixty thousand in losses.

I want to exit the company, but I am worried about further liabilities. My partner violated almost every portion of the operating agreement, but I don't have the resources for a full-scale legal battle. What should I consider in this case? Should I wait for the partner to take further action in court? Should I just sign the business over to him? Am I likely to have any tax liabilities?

Thanks in advance!

 

[Zigner]

My business partner and I have a service company in ME. We've had disputes ever since we started operations at the beginning of 2013. My partner insisted on being the president, but he hardly fulfilled any duties, let alone presidential. In early 2015, I got fed up with doing way more work and offered to leave the company as an employee and offered my partner to transition my duties. Instead, he hired a lawyer and has been trying to disassociate me, only offering to release from the business loan as compensation, ever since I left. They filed a lawsuit to disassociate me on a bogus accusation of misconduct. I filed for Chapter 7 and received a discharge. The trustee chose no-asset in the business, so I remain a shareholder. The partner is not yet responding to the business court with further action after my automatic stay expired.

The partner made many contributions to the business without doing the actual work on expanding operations. I only had time to build and run the infrastructure of the company and had no expertise or license on the operations side. We could never afford to distribute profits, and I owe taxes for prior years. I just received my long-delayed Schedule K for 2015 and it shows nearly sixty thousand in losses.

I want to exit the company, but I am worried about further liabilities. My partner violated almost every portion of the operating agreement, but I don't have the resources for a full-scale legal battle. What should I consider in this case? Should I wait for the partner to take further action in court? Should I just sign the business over to him? Am I likely to have any tax liabilities?

Thanks in advance!

Your situation is very fact-specific and personal and is beyond the scope of this (or any) internet forum. You need to contact business & tax professionals in your area.

 

[choink]

Your situation is very fact-specific and personal and is beyond the scope of this (or any) internet forum. You need to contact business & tax professionals in your area.

OK, what if I simplify the question? Generally, what are some things to watch out for when signing over member interest to a partner in a less-than-profitable business? There are no assets in the company, just decent income that could be improved with better management. I have no personal valuables or real estate. Should I insist on getting a FMV assessment and keep asking for compensation? Will I get in tax trouble for giving my shares away for free? Our operating agreement states that either member can transfer interest anytime without a special compensation arrangement.

 

[LdiJ]

OK, what if I simplify the question? Generally, what are some things to watch out for when signing over member interest to a partner in a less-than-profitable business? There are no assets in the company, just decent income that could be improved with better management. I have no personal valuables or real estate. Should I insist on getting a FMV assessment and keep asking for compensation? Will I get in tax trouble for giving my shares away for free? Our operating agreement states that either member can transfer interest anytime without a special compensation arrangement.

Did the bankruptcy include any business debts you personally guaranteed? That would be the main issue to look out for, that you are no longer personally responsible for the debts of the business. No, you would not get in any trouble for giving your shares away for free, if the company has no assets and currently is not making a profit.

 

[choink]

Did the bankruptcy include any business debts you personally guaranteed? That would be the main issue to look out for, that you are no longer personally responsible for the debts of the business. No, you would not get in any trouble for giving your shares away for free, if the company has no assets and currently is not making a profit.

Thank you so much for the response! Yes, the business loan was included in the bankruptcy filing. I now see light at the end of the tunnel.

 

[choink]

Did the bankruptcy include any business debts you personally guaranteed? That would be the main issue to look out for, that you are no longer personally responsible for the debts of the business. No, you would not get in any trouble for giving your shares away for free, if the company has no assets and currently is not making a profit.

As far as the IRS is concerned, what do they usually require for proof of member interest transfer to the other partner?

 

[LdiJ]

As far as the IRS is concerned, what do they usually require for proof of member interest transfer to the other partner?

A proper, written, interest transfer. However, the IRS would only ask to see something like that in very rare circumstances.