Technical topics regarding tax preparation.
1-Dec-2022 6:16pm
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I have a CA LLC (taxed as a partnership) that wants to convert to an S-Corp for both tax & legal purposes. I am wondering if it makes a difference if we either:
1. Convert LLC to Corporation and immediately elect S-Status.
2. Elect S treatment for the LLC then convert to corporation.
The potential problem with #1 is that for, tax purposes, this is treated as a liquidation of the partnership followed by a capitalization of a corporation. While, I don't anticipate any hidden tax traps on these two transactions, I would like to avoid it.
Would #2 avoid this?
1-Dec-2022 6:43pm
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The potential problem with #1 is that for, tax purposes, this is treated as a liquidation of the partnership followed by a capitalization of a corporation. . I did not know that. I thought it would be treated as formation of a corporation under 351.
1-Dec-2022 6:51pm
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Would #2 avoid this?. I think #2 would be treated as a 351 followed by an F reorg. #1 is easier. Same result.
1-Dec-2022 6:58pm
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Thank you.
I thought it would be treated as formation of a corporation under 351.
Yes. Formation and capitalization of a new corporation under 351. This should be tax free as tax basis in assets exceed debt.
Also, the liquidation of the LLC partnership should not be a problem because the two partners are getting 50% of everything - no special allocations of distributions.
1-Dec-2022 7:02pm
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Can we avoid having to change their EIN by doing one or the other?
https://www.irs.gov/businesses/small-bu ... -a-new-einLimited Liability Company (LLC)
You will not be required to obtain a new EIN if any of the following statements are true.
*An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation.
Corporations
You will not be required to obtain a new EIN if any of the following statements are true.
*Conversion at the state level with business structure remaining unchanged.
I think No. The legal business structure is changing at conversion.
1-Dec-2022 8:34pm
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The thrust of my posts above was triggered by your use of "convert" in OP.
I nw nothing about EIN rules.
1-Dec-2022 9:12pm
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Hi, Wiles,
The first sentence of your quote sounds like the instant situation to me. So I don't think a new EIN is appropriate when an LLC taxed as a partnership elects S status.
I'm a little confused by your use of the word "convert" -- because it has two meanings. One is converting to S status and the other is filing articles of conversion with the Sec'y of State.
Steve
1-Dec-2022 9:24pm
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The “convert” part of my question is the one you do with the SOS. Change the legal entity to a corporation.
This question is related to my ESOP question. From my understanding, in order to use an ESOP, the entity must be a corporation.
1-Dec-2022 9:46pm
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From my understanding, in order to use an ESOP, the entity must be a corporation.
Are you sure of that? See Private Letter Ruling Number: 201538021, June 18, 2015.
2-Dec-2022 4:51am
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Outstanding! Thank you, Leonard.
2-Dec-2022 8:35am
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2-Dec-2022 9:07am
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Yes, 357(c), but see this in #4 above. This should be tax free as tax basis in assets exceed debt.
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