Question

This year, Carrie and Ned formed CN LLC. Carrie contributed $300,000 of cash, and Ned contributed real estate valued at $450,000 (basis of $200,000). The property was subject to a recourse liability of $150,000 that was assumed by the LLC, but which is not guaranteed by either LLC member. Carrie and Ned’s profit sharing ratios are 40%/60%, respectively, but the loss sharing ratios are 50%/50%.

a. Is the debt treated as a recourse debt or a nonrecourse debt to the LLC members?

b. How is the debt allocated between Carrie and Ned?

c. What are Ned’s and Carrie’s bases in the LLC interest immediately after the LLC was formed? Show your calculations.

Answer 1

Answers : -

A. In LLC, loans made to the LLC or is guaranteed by the members can be treated as a resource debt. In LLC, any portion of the nonrecourse debt is not allocated to the members.

B. The debt between the LLC members are allocated as in the same as the loss sharing ratios.

C. The Ned's and Carrie's bases in the LLC interest will be according to the percentage ownership or number of membership units.

Calculations as follows : - Carrie's - $300,000 and Ned's - $450,000

$300,000 : $450,000 = $30 : $45 = 2 : 3

($300,000 ÷ 10,000 = $30) ($450,000 ÷ 10,000 = $45)

($30 ÷ 15 = 2) ($45 ÷ 15 = 3).