LLC elect S-Status, followed by conversion to S-Corp

Technical topics regarding tax preparation.
#1
Wiles  
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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?
 

#2
Nilodop  
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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.
 

#3
Nilodop  
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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.
 

#4
Wiles  
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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.
 

#5
Wiles  
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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-ein
Limited 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.
 

#6
Nilodop  
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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.
 

#7
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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
 

#8
Wiles  
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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.
 

#9
Nilodop  
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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.
 

#10
Wiles  
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Outstanding! Thank you, Leonard.
 

#11
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357 might be a concern
 

#12
Nilodop  
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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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