Single Member LLCs - DD & Financing

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July 11, 2022

by a searcher from Northwestern University in New York, NY, USA

Question for our great SF community:

For targets that are single-member LLCs that elect to be taxed as disregarded entities, how do you approach financial DD/QoE and financing? Especially for SBA loans, where recent tax returns are a must, I'm curious how this gets handled.

Thanks!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. It depends on how they report the income. If they report the income via a Schedule C then they would need to provide copies of the Schedule C from their personal tax return. They would eventually need to provide their full tax returns or provide access to transcripts of those tax returns to the lender, but up front we can work with the Schedule C and any pages that contain Statements from the Schedule C.

If they are operating an entity that is a disregarded entity of a C-Corp or S-Corp or other entity, then this can be substantially more challenging if you are only buying the assets in that disregarded entity and not the assets of the entire company. Typically speaking the SBA and lender will want to see tax returns for the main operating entity. They will then need to see detailed financial statements for the disregarded entity for several years and on an interim basis, preferably prepared by an outside accounting firm that can attest to them. In these cases we can typically get something done. I have seen a few cases where the accounting firm provided audited financial statements for a division so the lender did not even end up requiring tax returns, but that is rare.

Please let me know if you have any questions or would like to discuss further at any time at redacted Thank you.
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