structuring scorp to llc deal

Technical topics regarding tax preparation.
#1
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I will try and keep this concise, I have a new client (investor A) who has a RV park operating as an Scorp (sole shareholder). He wants to take on a partner (investor B), but they both would like to do it (especially Investor B) with a new entity. The attorney for my client recommended an LLC be set up, and the scorp would then be "dissolved into the llc" (his words), and then Investor B would buy 1/2 interest in the LLC. The attorney says it would basically be a reorganization (since single shareholder and single member llc are the same person)....it would save on transfer taxes income tax, etc

In my mind dissolving the scorp would still be looked on as a sale of assets, and my client would have capital gains on fmv of the assets over his cost basis....then he could move the assets into whatever entity he wished.

Am i missing something here, is there some way to accomplish getting the assets from the scorp into a new entity with an additional investor without subjecting my client to possible taxation? We are in Virginia.
 

#2
Nilodop  
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A drops its assets into Newco, a MMLLC taxed as a partnership, and B invests the agreed amount into Newco, and they each get the agreed % interest in Newco. But I'm assuming the new money stays in Newco. Is A expecting to get the new money?
 

#3
JR1  
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Wouldn't the existing S have to be the member in the new LLC? Otherwise, you're gonna have tax on whatever you do to end that S corp.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#4
Nilodop  
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Yes, of course. I used "A" carelessly and inconsistently. Substitute S corp. for A as first word of my post above.
 

#5
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The attorney is not competent to advise on this subject.
Steve
 

#6
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OK so if im following....Investor A would stay in the Scorp...and the Scorp would be one of the 2 llc members in the Newco LLC? Investor 2 will be paying $125k down and assuming 1/2 of the liabilities with investor 1.

One further wrinkle, they planned on electing scorp status for the Newco LLC......can investor 1 in an scorp, be an llc member in an llc thats also being treated as an scorp? im starting to get a headache.
 

#7
sjrcpa  
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No. An S Corp can own 100% of another S Corp if it makes a QSub election.
Other than that, S Corps can only be owned by individuals and certain trusts.
 

#8
sjrcpa  
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There is probably more to this. Such as an F Reorg.
 

#9
Nilodop  
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OP, do we now have all the facts? It really helps.
 

#10
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Very difficult to figure out what the plan is based on what has been presented.

I agree with the others that it would be most tax efficient (for the new owner) to form a new LLC. Then the S Corp contributes the assets to the LLC for ownership and the new individual contributes property, either cash or tangible assets, for ownership. This MMLLC would be taxed as a partnership.

Investor "A" has real estate trapped in an S Corp. Investor "B" doesn't have to.
 

#11
Nilodop  
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We don't even know whether "taking on a partner" means getting a new investment in the S corp., or sellng half of A's stock to a new investor, whether via direct or disguised means.
 

#12
JR1  
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I was wondering when someone would pick up the real estate already in an S corp...as Man did. I would NOT advise the new LLC become an S....why would B want that same problem?
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 


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