Forums: Discussions for entrepreneurs and small business.

In general, money or property contributed to an LLC is treated as a non-recognition transaction.  When one contributes property in exchange for interest in the LLC, that contributor does not usually recognize gain or loss on the contribution.  The contributor’s basis in the property is transferred to the LLC, and in exchange, the contributor gets an equal basis in interest. In other words, if you wire money to your LLC, the transfer of funds will not be deemed a taxable transaction and you basis and capital account in your LLC interest will be adjusted by the amount transferred.

For example: Steve contributes a building to the LLC.  The building is valued at $10,000, with a basis to Steve of $6,000.  Steve gets a 10% interest in the LLC in exchange for contributing the building.  Steve has no gain on the contribution: Steve’s basis in LLC interest is $6,000, and the LLC’s basis in the building is $6,000 (a “carryover basis”).  However, Steve’s capital account in the company is $10,000 (the fair market value of the building on the date of contribution ) .  Likewise, if Steve contributed $1,000 in cash to the LLC, he would have no gain on the contribution.  His basis in his LLC interest, and the LLC’s basis in his capital contribution would both be $1,000. Steve’s capital account would be $1,000.

SECTION 704(C) – CONTRIBUTION OF PROPERTY WITH BUILT-IN GAIN