I know I am not anyone’s client and am looking for websites that might allow me to educate myself on these things. I am withdrawing from a horrendous LLC. I have lost lots of money, and now, upon my leaving I am being asked to make whole my capital account, which sits at -60,000. This is a value taken from the K-1. It does not represent any money given to me by the group.
From what I have read this is an accounting mechanism and not recouped. I would like to find out if I am correct, and learn more on the subject as I go.
Any ideas you may have that I would find of value I would love to hear them.
A capital account keeps track of your investment in the LLC. Its balance increases by contributions you make and your share of the LLC’s profits and decreases by distributions made to you and your share of the LLC’s losses. So, here, it sounds like, over the whole time you’ve held the interest in the LLC, you either received as a distribution or were allocated losses that exceed by $60k the contributions you put in and profits you were allocated.
An LLC is goverened by its operating agreement. If you don’t have a copy, you should get one. It is very common for an operating agreement to say that partners are not liable for a deficit balance in their capital account. However, if it doesn’t say that, then the general rule is that you would beliable for any deficit balance on liquidation. It sounds like you are withdrawing instead of the LLC liquidating – one way around hour problem may be to just not withdraw.
Well, there have only been losses, and no money has ever been distributed to me. And yes, I was going to withdraw, rather than see the thing dissolve. What is the logical basis for saying loses need to be reimbursed when I have only put money in and never taken any out. There must be a reason that this accounting magic exists.
The logical basis is that you agreed to reimburse your share of any losses in excess of you’re contribution–there’s no “accounting magic” here. And, for tax purposes, you either already used those losses to offset other income or you will be able to do so once you pay up. Of course it is also possible that you didn’t agree to reimburse your share of losses–you need to look at the operating agreement.
Here’s another way to think about it. The only way the LLC could lose more than the amount contributed to it is if it borrowed money and lost that. They now want you to repay your share of the amount borrowed.
Of course, an LLC doesn’t have the default assumption that partners are individually liable for the debts of the partnership. Which is why, as you say, it’s all about the operating agreement.
In a very real sense, the original question isn’t even a tax or accounting question - it’s purely a legal question and would best be addressed by a lawyer. The question is: “Given the operating agreement I signed and the default laws of my state, do I have a liability to the LLC that I am obligated to repay if I withdraw?”
Isn’t the whole meaning of an LLC “Limited Liability Company”? Is that Britishspeak? Sort of the equivalent of limited as in “Acme Enterprises, Ltd.”
So unless you signed an agreement otherwise, theoretically you should be limited to what you put in.
The whole Lloyds insurance debacle, IIRC, was specifically that the company was not limited so the Names were on the hook for massive insurance losses.
If someone wants you to add more cash, the logical comeback is “show me where in the agreement it says that?”