USA Membership Units (LLC Partnership) provided as Compensation - Taxable?

Jun 7, 2019
Reaction score
United States
I always find it interesting the differing opinions you get when you have a bundle of Financial Professionals together with varying backgrounds and thought this scenario that came up during the instruction of a Minority Business Accelerator Class.
Company A is an LLC Partnership with 2 Existing Partners (Partner A and Partner B) that own 50,000 Membership Units Each (100,000 Membership Units Total).
Individual C has developed some IP that has no Tangible valuation but Company A wants to acquire this IP and all parties agree to a Purchase Price of $700,000 for the IP per the following Breakdown:..
Cash at Closing: $100,000
Note Payable (3 Year): $100,000
Company A Membership Units: 10,000 (@ $50/Unit x 10,000 = $500,000).
Here is where the fun began and all the varying opinions started coming about, so let's see how it play out on this forum as to how it should be entered:

Scenario 1 - Record all with a Cash Value:
Cash (Credit) $100,000
Note Payable (Credit) $100,000
Members' Capital (Credit) $500,000
Goodwill (Debit) $700,000
In scenario 1, the Individual C has to pay taxes on the entire balance or $700,000 (less the Deduction for the N/P (i.e. Loan)) but "C" now has $500,000 worth of Basis (External).

Scenario 2 - Record only Real Cash as Cash Values:
Cash (Credit) $100,000
Note Payable (Credit) $100,000
Goodwill (Debit) $200,000
In Scenario 2, only "true" cash is recorded, because the unit valuation has zero merit and nothing tangible was ever disbursed. Therefore, "C" does not have to pay taxes on the Units Provided because (in Reality) they have a true value of $0.00 per Unit, which also results in Zero Basis in Company A. Upon selling their shares, they would then end up paying a capital gains tax. The Membership Units would only be seen within the Cap Table.

These were the two most heated discussions, I won't bother with the others, so let's see what other opinions come about on this forum regarding this scenario. It will be fun to take more opinions back into class discussion next month.

*Note: One Tax professional mentioned utilizing Scenario 1 but Individual "C" would be able to take advantage of a "Minority Interest" Credit, not sure what he was talking about and he could not recall the Factual credit at the time.

Looking forward to see all of the opinions on this forum.

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Members online

No members online now.

Forum statistics

Latest member