Many years ago while I was studying for my LLM in tax, a friend of mine confided, after partnership tax class, that he would just avoid partnerships in his tax practice. Unfortunately, with the entrance of Limited Liability Companies and their cousins, LLPs, partnership taxation is here to stay.
One of the dilemmas that comes up from time to time is how to permit the entry of new owners into an operating LLC. For example, client Mr. Entrepreneur, starts a business as a LLC. After a couple of years two of the employees are generating 60% of the income of the entire business. The employees want to become owners in the business or they might leave and set up their own business. The owner wants to be compensated for his past equity contributions and wants to know how future borrowing with the Bank will be handled, since he has significant wealth and the new owners have little if any wealth. The Employees have little or no assets to purchase a share of the business and your client does not want to bonus the cash to buy him out, because it would be very expensive.