Sale of LLC Interest - Agreement Incl Alloc of Purch Price

LLC owned 50/50 by 2 members is selling to another party. This Sales Agreement specifically identifies this sale as a sale of LLC Membership Interest. The Sales Agreement goes on to allocate the sales price between asset categories:
* Personal Property $175K
* Goodwill $225K

Does that make sense? I only recall seeing these allocations when there is an asset sale.

Is the language such that all they mean is that's how they arrived at the sales price?

If the LLC is taxed as a partnership, then the buyer ends up owning a single member LLC, which is a DRE. The buyer is considered to have purchased assets and the sellers are treated as having sold partnership interests. (Rev. Rul. 99-6)

If the LLC is taxed as a corporation, then the membership interests are considered stock. The sellers are treated as selling stock, the buyer is treated as buying stock, and the allocation was meaningless unless there were an election to treat the stock sale as an asset sale. (338)

Is the language such that all they mean is that's how they arrived at the sales price?

It's more than that. The agreement also says each party shall report these allocations to the IRS. Below are excerpts from the agreement:

Buyer desires to purchase from Seller all of the <Member A> Membership Interest and all of the <Member B> Membership Interest pursuant to the terms and conditions contained herein;

Allocation of Purchase Price. The Purchase Price shall be allocated as follows: Goodwill: Two Hundred Twenty-Five Thousand and 00/100 Dollars ($225,000.00); Personal Property: One Hundred Seventy-Five Thousand and 00/100 Dollars ($175,000.00). Seller and Buyer shall timely file appropriate forms with the Internal Revenue Service in connection therewith. For purposes of Section 1060 of the Internal Revenue Code of 1986, as amended, Seller and Buyer agree to report the transactions contemplated by this Agreement in a manner consistent with such allocation. In addition, Buyer and Seller agree to provide each other with their respective Federal Tax Identification numbers on the Closing Date for purposes of reporting this transaction to the Internal Revenue Service.

The agreement was recently changed from an asset purchase to an LLC membership interest purchase. It could be the attorney for the buyer forgot to update/remove this paragraph.

For an unincorporated LLC interest, you need these allocations to determine the nature of the purchase price.
When accounting for sales of LLC interests, I would often have to go back to the parties and determine these items after the sale was complete, if I wasn't consulted prior. I'd offer this is a thoughtful and complete agreement...at least in contrast to many I've worked with.
Keep in mind, there may be 1245 recapture on the personal property to account for, which has a meaningfully different consequence to the seller.

Yep. We also have Inventory & A/R in this cash basis LLC that needs to be dealt with.

Perhaps due to these factors, the buyer's attorney is forcing due diligence among all parties with the IRS. Although, I think it was just an oversight. The attorney forgot to remove this paragraph when the deal changed.

Yep. We also have Inventory & A/R in this cash basis LLC that needs to be dealt with.

Perhaps due to these factors, the buyer's attorney is forcing due diligence among all parties with the IRS. Although, I think it was just an oversight. The attorney forgot to remove this paragraph when the deal changed.

I don't think you grasped my comment as I intended.

For income tax purposes...
Unincorporated LLC interest sale = Asset sale

The language and agreements will likely differ because of the legal structure underlying each transaction, but the substance of having to allocate value among the assets must still be determined. There is even an argument that Form 8594 should be filed when an LLC interest is sold to an outside party, which would be perfectly consistent with the agreement's paragraph you shared.

Yes. I did understand this is required for tax purposes. But for legal purposes, I do not recall ever seeing a sales agreement for a partnership interest include an asset allocation paragraph.

Yes. I did understand this is required for tax purposes. But for legal purposes, I do not recall ever seeing a sales agreement for a partnership interest include an asset allocation paragraph.

Either way, an agreement of the allocation needs to be memorialized as a part of the sales documentation. As I noted, it's often missed, but, IMO, should always be included.

Hi, Wiles,

You wrote: "The agreement was recently changed from an asset purchase to an LLC membership interest purchase. It could be the attorney for the buyer forgot to update/remove this paragraph."

Selling 100% of the membership interests simplifies the paperwork and avoids transferring titles, contracts, security deposits, etc. Even as a sale of membership interests, the allocation is for the benefit of both parties by resolving disputes in advance.