New LLC Partnership - Basis and distribution questions

[basalt]

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

My partner and I founded a new web service LLC mid-year. Neither of us put capital into the business. We did subsequently obtain loans in both our names and the LLC for $40,000 to start the business. We each have 50% interest and originally $0 basis.

I have been doing nearly all the work developing the business and software. We have agreed I should receive $$ for the work I have been doing. We currently have no profits as we haven't released the service yet.

So the questions are:
1) Is our basis still zero or does the loan become our cash basis and we each have a basis of $20,0000?

2) How do I receive the cash payment? I am unclear if it is a "guaranteed" payment, distribution, or just a payment for services (listed as an expense) and my basis is irrelevant.

Thanks!
Jason

 

[davew128]

So the questions are:
1) Is our basis still zero or does the loan become our cash basis and we each have a basis of $20,0000?

If you are personally liable for the loan then it is both basis and at risk.

2) How do I receive the cash payment? I am unclear if it is a "guaranteed" payment, distribution, or just a payment for services (listed as an expense) and my basis is irrelevant.

Guaranteed payments do not affect basis other than indirectly as a deduction to the business reducing income.

 

[FlyingRon]

You didn't pay anything for your LLC membership and you still haven't paid anything for your LLC membership. How you are compensated (now or the future) is up to the operating agreement. It won't however change the basis. If you're arguing your uncompensated work should somehow increase the basis, you'd also need to pay taxes on the "income" of that amount you "contributed" as basis. With rare exception things don't have "tax free" in business. If you get some exclusion in a tax it's because that mount was taxed somewhere else.

Generally, multimember LLCs are taxed like partnership. However you could also be treated as an employee.

You need to talk to a tax advisor. There's required filings (at the minimum of the end of the year, if not quarterly ones you've already missed).

 

[davew128]

You didn't pay anything for your LLC membership and you still haven't paid anything for your LLC membership.

While this is true, the default treatment of partnership would allocate the LLC liabilities to the members, which IS basis, and if there is a personal guarantee from the members, then its also at-risk.

 

[LdiJ]

While this is true, the default treatment of partnership would allocate the LLC liabilities to the members, which IS basis, and if there is a personal guarantee from the members, then its also at-risk.

I agree. The 40k worth of loans that they took out is absolutely basis.

However, I am a little iffy on the compensation that they have agreed is due to the OP. They have no income yet, so the only place to tap any money for compensation would be from that 40k, and that is going to effect basis...and be complicated tax-wise. What's more, since they are personally liable for the loan, would it be a reduction in the investment and therefore a reduction in basis, or would it be an expense?

They need a tax professional to research and form an opinion.

 

[tranquility]

I agree. The 40k worth of loans that they took out is absolutely basis.

However, I am a little iffy on the compensation that they have agreed is due to the OP. They have no income yet, so the only place to tap any money for compensation would be from that 40k, and that is going to effect basis...and be complicated tax-wise. What's more, since they are personally liable for the loan, would it be a reduction in the investment and therefore a reduction in basis, or would it be an expense?

They need a tax professional to research and form an opinion.

I agree regarding the loans. As to the compensation issue, don't be such a baby. How hard can a basis issue be?

http://www.bna.com/Income-Tax-Basis-p7583/

 

[LdiJ]

I agree regarding the loans. As to the compensation issue, don't be such a baby. How hard can a basis issue be?

http://www.bna.com/Income-Tax-Basis-p7583/

Sticking my tongue out Tranq....I was trying not to start a war...LOL