Question

R and J form an LLC. They agree to share profits and losses equally. R transfers cash of $500 and J transfers cash of $500. The partnership then acquires a parcel of land for $5,000, using the $1,000 total cash contributed by the partners and by obtaining a $4,000 loan that both R and J personally guarantee.

- What is each partner’s share of the recourse liability?

- What is each partner’s outside basis after the partnership incurs the liability?

Assuming the same facts, except R and J agree to share profits 50%/50% and losses 70%/30%. Answer the following:

- What is each partner’s share of the recourse liability?

- What is each partner’s outside basis after the partnership incurs the liability?

Assuming the same facts as above (i.e., same profit/loss sharing ratios) except that the liability is a non-recourse liability, answet the following in detail:

- What is each partner’s share of the non-recourse liability?

- What is each partner’s outside basis after the partnership incurs the liability?

Answer 1

Recourse liabilities means that partners bears the economic risk of loss with respect to the liability. The economic risk of loss is present only if any partner or any person related to a partner would be obligated to make a payment to the creditor or a partnership contribution upon a constructive liquidation of the partnership under certain hypothetical circumstances.

If the profit and loss ratio is equal than each partner's share of recourse liability is $2,000 each.

Since, there is no difference between Fair value and recorded value, in outside basis also, liability is $2,000 each.

Ratio changed to 70/30

Liability would be $2,800 for 70% share and $1,200 for 30% share.

If liability is non-recourse, there shall be Nil share of each partner in the liability.