A single-member LLC (“SMLLC”) is not subject to any tax. The IRS treats a SMLLC as a “disregarded entity,” which means the single member includes the business’s income, deductions, gains, losses, and expenses on their personal tax return.
The IRS will treat the sale of a SMLLC as if the seller sold the assets of the business (an “asset sale”), even if the sale is structured as a sale of the seller’s membership interest (an “equity/stock sale”).
For the Seller:
The seller’s taxable gain (or loss) is the difference between the Seller’s “basis” in their membership interest and the sale price. “Basis” generally means the amount of money paid for something. In this case, it is the value of the original contributions the seller made to the LLC, subject to various adjustments.
The tax rate the seller will pay on their gain depends on the type of assets sold. For some assets, the seller will pay a lower, “long-term capital gains” tax (generally, if the assets have been held for over a year). For other assets, known as “hot assets” (inventory, for example), the seller will pay their ordinary income tax rate on the gain from those assets.
For equipment assets that have been depreciated, the “depreciation recapture” rule will apply: when an asset is sold for a price that exceeds the asset’s depreciated value, all gains above the depreciated value will be “recaptured” and treated as ordinary income (as opposed to capital gains).
For the Buyer:
The purchase of a SMLLC is not a taxable event for the buyer. The buyer will not recognize a gain or loss as a result of purchasing an ownership interest in a SMLLC.
Again, the IRS treats the purchase of some or all of the equity in a SMLLC as an asset purchase.
This means the buyer receives a more preferential “stepped-up” tax basis in the assets, as compared to an equity/stock sale where the buyer would not receive a stepped-up basis.
Check out our Membership Interest Purchase Agreement to facilitate the sale of a Membership Interest.