USA How does it work when I accept funding for equity in my current single-LLC?


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Hi,

I currently have a small business that is set up as a single-member LLC. If I were to accept angel funding for a percentage of equity in my company would I then have to convert my business over to a multi-member LLC?

Also, how would this contribution get recorded in my business for tax purposes? Would this funding be shown on my Schedule C (single) or Schedule K-1 (multi)? Or would only the business expense from this contribution then show up on this Schedule?

Thank you!
 
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Yes, you would have to convert. A single-member LLC is not a separate entity for tax purposes. In this case, you are establishing a new entity (presumably electing to be taxed as a partnership), and then both you and the funding company take new ownership in the LLC. You will then file a short-year 1065 for the portion of the year after the acquisition and distribute Schedule K-1 to both yourself and the funding company (which is a second partner or potentially more), to report your share of the income (loss) on your personal return.

The funding itself is a balance sheet transaction to equity, not a deductible expense. You will establish capital accounts for both (or potentially more) partners. The partnership will take a basis ("inside" basis) in the assets transferred to the partnership at your original basis from the Schedule C. Because the other partner's interest will be different, his basis ("outside" basis) will be different the the inside basis. You will then consider taking a Section 754 election to equalize those bases, which is then irrevocable.
 

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