Tax on Investment to an LLC?

Posted by jgarbenzell on May 19, 2009, 8:32 pm

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I own a sole member LLC. Life was simple when the only capital
contribution to the LLC was from me.

Now an investor wants to join in. This investor is not from the US.

(in case this wasn't obvious, my LLC is US based and I live in the US
as well)

I don't want him to join as a member but rather contractually promise
some returns in the future (if the LLC makes enough profit of course).

This is almost as if it is a loan but it's not really a loan, it's an
investment.

Do I have to pay tax on that investment? (it's less then $15K)

If so, is there a way to label this money such that it would be
considered taxable?

Please note: I am not asking to evade taxes. I am only asking to be
tax-smart. No one likes to pay more taxes than necessary, especially
when every penny from this small investment is critical to the LLC
success.

Advice?

Thank you,
John

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Posted by jgarbenzell on May 19, 2009, 9:32 pm

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Oops... please correct this irritating typo that reversed the meaning
completely:

Instead of "is there a way to label this money such that it would be
considered taxable?"

it should read:

is there a way to label this money such that it would be considered
NON taxable?

Thank you,
John

On May 19, 8:32 pm, jgarbenz...@yahoo.com wrote:

> I own a sole member LLC. Life was simple when the only capital

> contribution to the LLC was from me.

> Now an investor wants to join in. This investor is not from the US.

> (in case this wasn't obvious, my LLC is US based and I live in the US

> as well)

> I don't want him to join as a member but rather contractually promise

> some returns in the future (if the LLC makes enough profit of course).

> This is almost as if it is a loan but it's not really a loan, it's an

> investment.

> Do I have to pay tax on that investment? (it's less then $15K)

> If so, is there a way to label this money such that it would be

> considered taxable?

> Please note: I am not asking to evade taxes. I am only asking to be

> tax-smart. No one likes to pay more taxes than necessary, especially

> when every penny from this small investment is critical to the LLC

> success.

> Advice?

> Thank you,

> John

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Katie on May 19, 2009, 11:18 pm

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On May 19, 6:32 pm, jgarbenz...@yahoo.com wrote:

> Oops... please correct this irritating typo that reversed the meaning

> completely:

> Instead of "is there a way to label this money such that it would be

> considered taxable?"

> it should read:

> is there a way to label this money such that it would be considered

> NON taxable?

> Thank you,

> John

> On May 19, 8:32 pm, jgarbenz...@yahoo.com wrote:

> > I own a sole member LLC. Life was simple when the only capital

> > contribution to the LLC was from me.

> > Now an investor wants to join in. This investor is not from the US.

> > (in case this wasn't obvious, my LLC is US based and I live in the US

> > as well)

> > I don't want him to join as a member but rather contractually promise

> > some returns in the future (if the LLC makes enough profit of course).

> > This is almost as if it is a loan but it's not really a loan, it's an

> > investment.

> > Do I have to pay tax on that investment? (it's less then $15K)

> > If so, is there a way to label this money such that it would be

> > considered taxable?

> > Please note: I am not asking to evade taxes. I am only asking to be

> > tax-smart. No one likes to pay more taxes than necessary, especially

> > when every penny from this small investment is critical to the LLC

> > success.

> > Advice?

> > Thank you,

> > John

I think you'll have to make a choice. You can characterize it as a
capital investment, in which case it's not taxable income but your
investor has become a member of your LLC. So now it is a multi-member
LLC, no longer a disregarded entity but taxed as a partnership.
You'll have to modify the LLC's operating document, if it has one, or
draw up an operating agreement. You'll need an attorney's help for
that.

The other alternative is to treat it as a loan, with payment of
interest and principal contingent on operating results of the
business. Again, you'll need an attorney's help to set this up.

Whatever you do, be sure that all of the terms and conditions of your
arrangement with your investor are clearly set out in writing.
Otherwise you have a recipe for expensive litigation in the future.

Katie in San Diego

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Stuart A. Bronstein on May 20, 2009, 9:31 am

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> jgarbenz...@yahoo.com wrote:

>> > I own a sole member LLC. Life was simple when the only capital

>> > contribution to the LLC was from me.

>> > Now an investor wants to join in. This investor is not from the

>> > US.

>> > I don't want him to join as a member but rather contractually

>> > promise some returns in the future (if the LLC makes enough

>> > profit of course).

>> > This is almost as if it is a loan but it's not really a loan,

>> > it's an investment.

> I think you'll have to make a choice. You can characterize it as

> a capital investment, in which case it's not taxable income but

> your investor has become a member of your LLC. So now it is a

> multi-member LLC, no longer a disregarded entity but taxed as a

> partnership.

Exactly. But this isn't just a tax issue. It also has other serious
legal implication.

First, if the investor isn't also a managing member, his investment
implicates the securities laws. If you don't comply with those,
there could be some real legal problems if everything doesn't go
perfectly.

If the money is taken as a loan, it could easily violate usury laws,
which could also get you both into trouble.

Really, spend the money to talk to a lawyer before you do something
that can't be fixed.

Stu

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Gene E. Utterback, EA, RFC, AB on May 26, 2009, 3:58 pm

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> On May 19, 6:32 pm, jgarbenz...@yahoo.com wrote:

>> Oops... please correct this irritating typo that reversed the meaning

>> completely:

>> Instead of "is there a way to label this money such that it would be

>> considered taxable?"

>> it should read:

>> is there a way to label this money such that it would be considered

>> NON taxable?

>> Thank you,

>> John

>> On May 19, 8:32 pm, jgarbenz...@yahoo.com wrote:

>> > I own a sole member LLC. Life was simple when the only capital

>> > contribution to the LLC was from me.

>> > Now an investor wants to join in. This investor is not from the US.

>> > (in case this wasn't obvious, my LLC is US based and I live in the US

>> > as well)

>> > I don't want him to join as a member but rather contractually promise

>> > some returns in the future (if the LLC makes enough profit of course).

>> > This is almost as if it is a loan but it's not really a loan, it's an

>> > investment.

>> > Do I have to pay tax on that investment? (it's less then $15K)

>> > If so, is there a way to label this money such that it would be

>> > considered taxable?

>> > Please note: I am not asking to evade taxes. I am only asking to be

>> > tax-smart. No one likes to pay more taxes than necessary, especially

>> > when every penny from this small investment is critical to the LLC

>> > success.

>> > Advice?

>> > Thank you,

>> > John

> I think you'll have to make a choice. You can characterize it as a

> capital investment, in which case it's not taxable income but your

> investor has become a member of your LLC. So now it is a multi-member

> LLC, no longer a disregarded entity but taxed as a partnership.

> You'll have to modify the LLC's operating document, if it has one, or

> draw up an operating agreement. You'll need an attorney's help for

> that.

> The other alternative is to treat it as a loan, with payment of

> interest and principal contingent on operating results of the

> business. Again, you'll need an attorney's help to set this up.

> Whatever you do, be sure that all of the terms and conditions of your

> arrangement with your investor are clearly set out in writing.

> Otherwise you have a recipe for expensive litigation in the future.

> Katie in San Diego

I'm with Katie on this - you either have an investor or a lender. You get
to pick, but pick you must. You may also decide what the repayment terms
are and I see no legal reason that can't be whatever you both agree to. BUT
you must be careful and remember that tax law is governed by the theory of
substance over form. Word your loan agreement incorrectly and the IRS can
reclassify it as a capital investment and BANG - you now have a multi member
LLC.

You also need to be careful about the Tax Shelter Rules - I do NOT do much
work in this arena but I seem to recall special rules if more than a certain
percentage of profits (20% or 25% come to mind) of escape U. S. taxation
then you have to abide by the restrictive and tricky tax shelter rules.

Good luck,
Gene E. Utterback, EA, RFC, ABA

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>