Planning for current distributions from an LLC.

• Author: Ellentuck, Albert B.
• Position: Limited liability companies

A limited liability company (LLC) transfers cash and property to its members by making distributions. A distribution of cash or property from an LLC classified as a disregarded entity has no tax ramifications because the assets transferred are already deemed the owners assets for federal taxes (although legal ownership is vested in the disregarded entity).

A distribution of cash or property from an LLC classified as a C corporation may represent a salary payment, a dividend, a return of capital, or a distribution made in partial or complete liquidation. (Unless the distribution is specifically classified by the entity as a salary, the IRS will argue that any corporate distribution is a dividend.) Each of these types of payments has different tax consequences for the LLC and the owner.

A distribution from an LLC classified as a partnership may represent a guaranteed payment, a return of capital, a distribution of operating profits, or a disguised sale of property. A distribution to a member in an LLC classified as a partnership may be a liquidating distribution or a current distribution. A liquidating distribution is a distribution (or a series of distributions that may extend beyond one year) that completely liquidates a member's interest in the LLC. Under the general rule of Sec. 731(a), current distributions of cash or property are not taxable to the distributee member if the amount of cash received does not exceed the member's tax basis in the LLC. The basis of the distributed property in the hands of the distributee member is equal to the LLC's basis in the distributed property immediately before the distribution, limited to the total amount of the member's basis in his or her LLC interest.

Observation: Special rules apply in determining the basis of distributed property when multiple properties are distributed in a liquidating distribution or when multiple properties are distributed and the total carryover basis of the distributed properties exceeds the member's basis in the LLC.

Generally, a distribution to a member has no effect on the LLC. However, the LLC may recognize gain or loss on a distribution of so-called hot assets (generally, unrealized receivables and substantially appreciated inventory).

Loans from LLCs to members are not taxable, but if the transfer of money from an LLC to a member is treated as a loan, a subsequent cancellation of the debt will result in a deemed distribution of money to the member at the time of cancellation (Regs. Sec. 1.731-1(c)(2)). Because loans to LLC members are not taxable, but...