Generally, unless a single-member LLC elects to be treated as a corporation it will be considered a disregarded entity under the IRS check-the-box regulations. Since the entity is disregarded, its assets, liabilities and operations are considered owned directly by the sole member. Thus, if the buyer purchases only the membership interest in an LLC and not the LLC’s individual assets under state law, federal tax law treats the acquisition of that interest as a direct purchase of the LLC assets. Consequently, a sale of the membership interest under state law will be considered a direct sale of the LLC assets for federal tax purposes and the sale proceeds must be allocated among the LLC assets according to their relative fair market value or an applicable asset allocation agreement.
If the buyer is only purchasing a percentage interest in the LLC, rather than all of the membership interest, the calculations can become even more complex. The gain realized by the seller, as well as the buyer and seller’s basis and holding period for the LLC assets, will be determined by how they structure the transaction. In Revenue Ruling 99-5 the IRS reached differing conclusions regarding the tax treatment for the sale of a percentage ownership interest in a single member LLC even though the buyer ended up with the same 50% interest in both situations. Their holding was based on whether the seller sold a portion of their interest in the LLC directly to the buyer or the buyer contributed cash to the LLC in exchange for their interest.
When buying or selling all or part of a business, it is important to discuss the tax ramifications with an experienced tax attorney who is knowledgeable regarding the various ways to structure the transaction. Many times the parties only consider the state law issues and neglect to account for federal tax consequences at the time of the sale. If you need assistance with the purchase or sale of an ongoing business, contact an Attorney in Jacksonville who can help you today.