Equitably Combining two LLCs

[Tim Stolt]

I have found myself in a problem that I need help resolving. I am not complaining here, this is a good problem to have, but a problem none-the-less.
Background - Almost three years ago, two partners and I created STH, LLC and purchased two 4-plexes. We have very recently signed a sale contract and want to 1031 exchange the profits. Until a couple of days ago, partner T (Travis) and I were under the impression that partner S (Steve) wanted to be cashed out upon the sale. From there Travis and I were going to exchange the remaining funds into a new property owned by STH, LLC.

Travis and I, along with (new) partner Ross, established Front Porch LLC about 2 months ago and started buying single family homes in our area.

Problem: The plan was to have Ross buy out Steve of STH LLC. This would have resulted in two LLCs with the same three partners, one necessitated by the 1031, the other being our main acquisition company. Now that Steve wants to stay in STH, LLC, Ross is going to be left out of STH and Front Porch LLC will become almost stagnant until more money can be made/saved. This is a problem because Ross was expecting to be buying SFH in Front Porch using his money and the money earned through the upcoming sale/exchange. I want to find an equitable solution to bring these two companies and four partners together without breaking the 1031 rules. The way I see it right now is that if I do right by Steve, I hurt Ross; and vice versa. I imagine there has to be a solution where everyone is a winner. I know this probably got a little confusing but are there any thoughts or suggestions?

[Dave Foster]

@Tim Stolt, There's something I'm not seeing here. If STH LLC is doing the 1031 then Ross and Front porch would hot have access to the 1031 from STH anyway. Unless STH and Front porch (Ross's money) were going to purchase as tenants in common.

But try this on for size.  The IRS does not care who the membership of STH is.  STH is the tax payer for the property you are selling.  So whoever the members are is irrelevant.  

So what if STH added a member (Ross) who purchased equity in the company for cash.  And Front porch becomes either a wholely owned subsidiary of STH.  Or Front porch dissolves and contributes their assets to STH in exchange for capitalization adjustments of membership.

Either of these mean that going forward it would be 4 rather than 3.  But you and Travis could reconcile your double interests with additional interest in the surviving entity.  The only real downside I can see is that it's now 4 rather than three members and one of those members is iffy anyway (or communication hasn't been great between you to date).  So you probably need to take everyone on a getaway someplace nice and work through commitment issues.

It's not an easy problem and takes a sharp pen.  It'll require that your accountant be on their A game.  But I think doable.