Question: I am forming a partnership with a friend. He does not have any money but will contribute his service exchange of 50% of the partnership. I will contribute cash. Is there any tax problem with the structure?
Answer: Generally, no gain or loss shall be recognized to a partnership or LLC or any of its members in the case of a contribution of property to the LLC in exchange for an interest in the LLC. Property can be as money, real property or tangible personal property. Some of the intangible property is considered as property as well.
Service, however, it is not considered property. Whether the services in exchange for partnership interest is taxable or not is dependent on what type of LLC interest is received. If the partner only receives the profit interest, not capital interest, the contribution of services in exchange for a profits interest would not result in a taxable gain. However, if the interest your friend acquiring is capital interest, there will be a taxable gain.