Questions regarding best way to transfer LLC ownership

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the11diesel
Posts: 143
Joined: Wed Sep 05, 2007 10:18 pm

Questions regarding best way to transfer LLC ownership

Post by the11diesel »

Fellow Bogleheads-

I started a consulting firm with a colleague about 5 years ago. The consulting firm is an LLC taxed as an S Corp. I am leaving this consulting firm and my partner in the firm is going to continue running the firm without me. The split is amicable, and I am looking for the administratively easiest way to transfer the ownership to my partner.

To this end, I have a few questions:

(1) I am considering gifting my ownership interest to my partner. My basis in the LLC is $6,000, which is well below the gift tax exclusion of $15,000. If I gift my interest in the LLC to my partner, could I simply assume the $6,000 as fair market value, or would I need to have an independent valuation? Obviously, given how small of operation the LLC is, getting an independent valuation would likely be cost-prohibitive.

(2) Is there anything else I should be considering for purposes of gifting my interest to my partner?

(3) In lieu of gifting my interest to my partner, I am considering selling my interest to my partner for some nominal amount. Would selling (instead of gifting) be administratively easier?

TIA for the always helpful comments from the Boglehead community.

-RJ
Topic Author
the11diesel
Posts: 143
Joined: Wed Sep 05, 2007 10:18 pm

Re: Questions regarding best way to transfer LLC ownership

Post by the11diesel »

Shameless bump in case anyone can provide any guidance on my issue. Thanks in advance y'all.
count damoney
Posts: 167
Joined: Wed Dec 02, 2020 12:13 pm

Re: Questions regarding best way to transfer LLC ownership

Post by count damoney »

What does your operating agreement say about transfers of interest?

As for what's easiest, probably to dissolve the LLC and let the remaining partner form a new LLC or operate as a Sole Proprietor.
Topic Author
the11diesel
Posts: 143
Joined: Wed Sep 05, 2007 10:18 pm

Re: Questions regarding best way to transfer LLC ownership

Post by the11diesel »

Thanks for the comments and questions.

We have nothing related to it in our operating agreement--so, we have total flexibility in how we go forward. My partner would like to continue the firm rather than dissolve it, so that is the approach I'm trying to take.
count damoney
Posts: 167
Joined: Wed Dec 02, 2020 12:13 pm

Re: Questions regarding best way to transfer LLC ownership

Post by count damoney »

If nothing in the operating agreement, you then follow state law.

My state statutes say you only have to file a notice of withdrawal with the LLC.
caramou
Posts: 16
Joined: Thu Aug 19, 2021 3:03 pm

Re: Questions regarding best way to transfer LLC ownership

Post by caramou »

First, I'd consult an attorney or a CPA. S-Corps can be fickle and blowing an S election, although unlikely, would not be a good time for you or the remaining partner.

Second, dissolving the LLC is not be the easiest way to handle this and could cause a lot of headaches with current contracts, intellectual property, tax issues, etc.

With that, here are my two cents. Gifting or selling should be relatively straightforward options that likely only involve LLC interest transfer documents. For the gift, if the FMV is truly under $15k, which you should try to reasonably base off the company's financials, then you are right that there might not be any gift tax issues. Note, that your basis might not be FMV of the LLC interest. If you sell the LLC interest, keep in mind that a price above your basis may trigger some amount of tax. Could also structure as a redemption by the Company. For the sale/redemption, need to consider how company and you will report any gain/loss.

Seriously though, a couple hours with an attorney or CPA will help make sure everything stays above board.
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