Convert or Not to Convert LLC to C Corp with possible sale

Client of mine is a SMLLC formed about 10 years ago and is now firmly in the highest individual tax bracket. Client wants to elect C Corp status to enjoy the lower tax rates but he also wants to sell the business within the next 6-12 months. If we strictly look at tax savings for conversion, he'll save approximately $40k between federal and state taxes.

I haven't heard a sale price but I would guess anywhere between $2m - $10m based on sales and cash flow figures.

But I'm thinking selling the LLC is much easier and he'll enjoy long term capital gains rate on the sale. The assets are basically small amount of office furniture and cash (it's a software engineering company) and his personal goodwill.

If we strictly look at tax savings for conversion, he'll save approximately $40k between federal and state taxes.
.....The assets are basically small amount of office furniture and cash (it's a software engineering company) and his personal goodwill.

So how does the flat 21% rate as a C-corp PLUS double taxation of cash dividends save any money over one flat rate of 23.8%?

No kidding. Great move for taxpayers. Not so much for him.

Keep the goodwill outside the C corp and pay capital gains, only, on it, when you sell it. Maybe you also need to have a non-compete between the proprietor and the corporation. What's the name of that court case, anyway? Sometimes misspelled, it suggests that this can work. Uhhhhh…

Martin Ice Cream.

You do understand, BFS, that he's going to pay all the same personal taxes anyway, but then in addition to the C corp tax hit, which will be significant? Dead loser on arrival.

Is personal goodwill not subject to NIIT?

https://www.thetaxadviser.com/issues/20 ... e-tax.html

•Because gain from the sale of personal goodwill is income from a personally developed intangible asset that is not passive income, and, generally, income from personal service activities is not passive, the gain from the sale of personal goodwill should not be subject to the net investment income tax.

When I took "tax provision" class, my professor always gave us examples of start-up company merger and acquisition in the bay area.

I remember, he says, seller always prefers to stock sale and buyer always loves asset sale. Seller prefers stock sale because lower rate and no double taxation. When sale goes through C corp, C corp need to pay taxes on the gain and the distribution to shareholder is dividend.

I saw a taxpayer with SMLLC was purchased by a big company. The company hired taxpayer for 3 years ( company does not even want to bother about no compete clause) and major income is from purchasing company's stock.

I also saw a seller ( S corp owner) received form 8954 from acquiring company with majority sales proceeds allocated to personal goodwill.

So how does the flat 21% rate as a C-corp PLUS double taxation of cash dividends save any money over one flat rate of 23.8%?

Client leaves most money in the company so double tax isn't a short term issue. And if he can structure sale as a stock sale, double tax avoided.

You do understand, BFS, that he's going to pay all the same personal taxes anyway, but then in addition to the C corp tax hit, which will be significant? Dead loser on arrival.

I don't see it the same way. He only takes a reasonable salary as shareholder employee and then leaves most money in corporation to be reinvested as just stated. And since sale of company would take place in 6-12 months he would be able to get all of it out by negotiating a higher price on stock. This is very dependent on his ability to structure the deal perfectly. But I do believe this would not work out perfectly since that would not be in the buyers best interest. So at the end of the day the relatively small savings (if everything works out perfectly) probably isn't worth it.

This is very dependent on his ability to structure the deal perfectly. But I do believe this would not work out perfectly since that would not be in the buyers best interest. So at the end of the day the relatively small savings (if everything works out perfectly) probably isn't worth it.

Do a quick calc on how far you'd end up behind with more likely numbers on the subsequent sale and you'll probably see the risk is not nearly worth the potential reward.

All in the hopes of a stock sale, which is 99.99% unlikely. Imagine you're the legal dept at a large corp and the M&A guy comes in and asks if it's ok to just buy the corp stock of a target...