LLC buys Corp

[AZ-Tax]

Got a prospect who formed an LLC with her spouse (only 2 members) and then purchased a corp restaurant. The prospect mentioned something about buying corp will avoid them from having to apply for liquor license which I know nothing about but I am guessing they will need to file a form 1120 Corp tax return, correct?

[Koss]

LLC owns a corporation

They may well be correct that by purchasing the corporation, they will avoid having to apply for a new liquor license. Of course, I know nothing of the liquor licensing laws in your jurisdiction. But if it's anything like Ohio, they will need to report to the state liquor licensing authority the fact that the corporation has a new majority stockholder.

And that's the key to your question. If the transaction was done correctly, then the LLC that your client formed now owns 100% of the stock in the corporation. Their objective was that they did not want the ownership of the restaurant to change. And it hasn't. The corporation still owns and operates the restaurant. What has changed is who controls the corporation.

To answer your question: Since the corporation has not been dissolved, yes, they will need to file a tax return for the corporation. The corporation's earnings/profits would be paid to the stockholders in the form of dividends, unless it is an S corp. But the corporation has only one stockholder--the LLC that your client formed.

The LLC then needs to file a tax return to report that income--unless you can and do treat it as a husband/wife joint venture, in which case you can just split everything down the middle and file two Schedules C.

BMK

[Davc]

The IRS specifically states that an LLC can not be reported as a "qualifying joint venture."

[Koss]

Limited Liability Company

The IRS specifically states that an LLC can not be reported as a "qualifying joint venture."

Can you cite an authority for this?

BMK

[Koss]

QJV Election

I stand corrected.

As noted by Davc, it appears that an LLC in which a husband and wife are the only members cannot make the election to be a qualified joint venture, and thereby avoid the need to file a partnership return.

I stand by my original comments about the corporate tax return discussed in the original post.

I did not take the time find a statutory or regulatory authority on this issue. But a Google search turned up an article published in February, 2010, by a tax attorney at Iowa State University. It says:

Under the provision, a qualified joint venture, includes only those businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a general or limited partnership or limited liability company). So, spousal LLCs, for example, are not eligible for the election.

The rest of the article is a rather arcane discussion of how the QJV election can affect married couples that operate family farms. For those that are curious, the article is available here:

http://www.calt.iastate.edu/briefs/CALTLegalBrief-SpousalJointVenture.pdf

BMK

[Lion]

Ttb

TTB says, "The IRS has taken the position on their website that a husband and wife unincorporated business organized as an LLC may not make the election to file as a qualified joint venture."

Here is one IRS link: http://www.irs.gov/businesses/small/...177376,00.html

[AZ-Tax]

So how do the replies affect my initial questions?

Since the only members of the LLC are a married couple and the LLC owns the C Corp, the C Corp still files a C Corp tax return and C Corp has only one shareholder, the LLC, correct? Now, the LLC even though its only two members is a married couple, files a partnership, correct?


What advantage if any did the married couple have becoming an LLC then having their LLC purchase the C Corp vs. the married couple directly buying the C Corp and skipping the LLC?

[Koss]

Limited Liability Company

What advantage if any did the married couple have becoming an LLC then having their LLC purchase the C Corp vs. the married couple directly buying the C Corp and skipping the LLC?

Maybe no advantage at all. Some might argue that this decision is just increasing their legal and professional fees, without providing any material benefit. Their lawyers and accountants make more money. (That's you, by the way. You didn't recommend the LLC, but you may in fact benefit from it. )

But it's very subtle. Without the LLC, the couple would have had to simply purchase the corporation's stock. How would they have done that? Buy all the stock as a married couple? As joint tenants with right of survivorship, or as tenants in common? In other words, what happens if one dies? Does their share go to the other spouse? Or kids from another marriage, or...

The LLC, functioning as a partnership, with all the baggage of capital accounts and membership interests, may give them more flexibility in how they divide up the ownership interests and the income. It may also give them more flexibility if they later decide they want to add an additional partner, or sell only part of their ownership interest. Or buy another restaurant. Or open another restaurant.

With the income passing from the corporation to the LLC, and then to each spouse as a partner, maybe some of the income is passive.

You may need to ask a lot more questions.

In formal partnerships, it is not unusual to have a scenario where one partner is putting up most or all of the seed money to start the business (or buy a going concern), while the other partner is going to work much more than the one with the money. Sometimes the guy without the money is bringing experience and expertise to the business that the guy with the money doesn't have.

This may not be the case with your married couple. But if it is, the partnership structure makes it a lot easier for the partner who didn't put up any money to acquire an ownership interest in the business.

BMK

[JON]

Confused

"Their objective was that they did not want the ownership of the restaurant to change." Obviously the ownership of the stock changed. LLC is just another layer of "protection" from outside events of the operation to the operations.

Who qualifies for "the joint venture' exclusion??

[Koss]

Change of Ownership

Obviously the ownership of the stock changed. LLC is just another layer of "protection" from outside events of the operation to the operations.

Yes, the ownership of the stock changed. The ownership of the restaurant did not change. Before the couple bought the stock, XYZ Corporation owned the restaurant. After the couple bought the stock, XYZ Corporation still owns the restaurant. Because the ownership of the restaurant has not changed, the restaurant does not need to apply for a new liquor license.

As an analogy, suppose your flower shop owns a delivery vehicle. The vehicle is registered to the flower shop, which is a corporation. You sell the business by selling all shares of the stock. The ownership of the vehicle has not changed. The new owners of the flower shop do not have to get new license plates for the vehicle.

But that doesn't explain why they formed an LLC. The corporation that owns and operates the restaurant already has limited liability. The LLC doesn't give them any additional protection.

Who qualifies for "the joint venture' exclusion??

If a husband and wife jointly operate a business, without forming a legal entity, and they meet certain other criteria, then they can just split everything 50/50 and file two separate Schedules C, without having to file a partnership return. There is a brief discussion of this in the IRS instructions for Schedule C.

A simple example might be if a husband and wife work together cleaning houses or something. Other popular examples have involved husband/wife driver teams, like over-the-road truckers, or if they own their own taxicab. But it's not based on the type of work. It's based on the structure. I think it has to be 50/50, where the ownership of the assets and the income is split down the middle. They both have to be materially participating, but they don't have to show that the work is 50/50. The "qualifying joint venture" election could just as easily be applied to a husband and wife operating a tax practice.

BMK

[AZ-Tax]

Jon, is your question directed to me?

Is your quesiton directed @ me?

[AZ-Tax]

Single Member LLC & Joint Venture LLC for only Rental.

Who qualifies for "the joint venture' exclusion??

If a husband and wife jointly operate a business, without forming a legal entity, and they meet certain other criteria, then they can just split everything 50/50 and file two separate Schedules C, without having to file a partnership return. There is a brief discussion of this in the IRS instructions for Schedule C.
BMK

I acquired a client who operates a "seamstress" business and her previous preparer (CPA) was filing a Sch C for her business for which I continued. Her husband participates very little (way less then 50%). For protection I discussed her business consider an LLC. Correct me if I am wrong but if her business becomes a "single member" LLC, she can continue to file a Sch C?

Also, a 2 member (husband & wife) LLC for the sole purpose of owning a rental property. I thought I read due to this "passive income", this would be a "joint venture" exclusion (meaning no P'Ship return needs to filed), correct? And if correct, does only 1 Sch E (form 1040) need to be filed?

[Koss]

Single Member LLC

I acquired a client who operates a "seamstress" business and her previous preparer (CPA) was filing a Sch C for her business for which I continued. Her husband participates very little (way less then 50%). For protection I discussed her business consider an LLC. Correct me if I am wrong but if her business becomes a "single member" LLC, she can continue to file a Sch C?

You are correct. A single-member LLC is classified by the IRS as a sole proprietorship, unless the taxpayer makes an election to be treated as a corporation.

BMK

[Koss]

Multi-member LLC

Also, a 2 member (husband & wife) LLC for the sole purpose of owning a rental property. I thought I read due to this "passive income", this would be a "joint venture" exclusion (meaning no P'Ship return needs to filed), correct? And if correct, does only 1 Sch E (form 1040) need to be filed?

This is not my understanding of the rules.

First: It is very clear that an LLC in which the spouses are the only members cannot make the Qualified Joint Venture Election. The IRS website says:

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

Here's the link:

http://www.irs.gov/businesses/small/article/0,,id=177376,00.html

This principle applies to rental real estate as well as other types of business activities. If the spouses have an LLC, they can't make this election.

On the other hand, if the spouses jointly own and operate a rental property without forming a legal entity, then the QJV election is indeed available. But the IRS guidance says that the spouses should report the rental income and income on two separate Schedules C, instead of using Schedule E.

If that sounds bizarre, that's because it is.

The IRS guidance goes on to say that using Schedule C to report the rental income and expenses on Schedule C in this manner does not change the fact that it is passive income, and it does not make it subject to self-employment tax.

Here's the relevant text from IRS Publication 527, Residential Rental Property:

Generally, Schedule C is used when you materially participate in your residential rental activity.

Providing substantial services. If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C, Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For information, see Publication 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5.

Qualified joint venture. If you and your spouse each materially participate (see Material participation , later) as the only members of a jointly owned and operated rental real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage.

If you make this election, instead of filing Schedule E or Form 1065, U.S. Return of Partnership Income, you and your spouse must each file a separate Schedule C or C-EZ reporting the appropriate share of income and deductions. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules, unless it is a trade or business. Electing qualified joint venture status and using the Schedule C or C-EZ does not alter the application of the self-employment tax or the passive loss limitation rules.

If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.

This is all very interesting. But unfortunately, if your clients have formed a two-member LLC, then they have to file a partnership return--unless they make an election for the LLC to be treated as a C corp or as an S corp, in which case they would need to file an 1120 or an 1120S.

BMK