S Corp conversion to LLC

[DaveinTexas]

Client, at the urging of his attorney, has converted his solely owned S Corp to an LLC. Different entity type, same ownership, same State. There is a private letter ruling (don't have it handy) that mentions a tax free re-org and it pertains to this exact situation.

Also, there is no need to obtain a new EIN, per IRS rules concerning tax free conversions.

Where I was stumped is, does the LLC have to file a 2553 to elect S Status or does is the LLC merely a name change (check the box on the 1120S)? I have since found a message board (Harvard business school) and one of the posters said that the taxation of the LLC is tied to the EIN, which means that if no election is made at all the IRS will treat the LLC as an S Corp. Also, for the record, I called the IRS Practitioner line to confirm that no new EIN. Applicationor new 2553 election must be made. I don't trust the reliability of IRS employees but at least I have something to fall back on.

Anyone have any experience with this and do you agree with the thought that the taxation of the entity follows the EIN?

TIA!

[luke]

Dave

I did this 2 years ago - IRS treated it as name change - kept FEIN and Scorp filing status - took forever to get all others on board (state agencies mainly) even after I sent letters of explanation..

[Gary2]

Is it fair to assume that this only works if the LLC elects corporate treatment? Otherwise, wouldn't it have to be treated as a dissolution?

Is there a particular reason why the attorney recommended this? The one thing I can think of is that, in most states, an LLC doesn't have to be as meticulous in holding annual meetings and maintaining corporate minutes as a true corporation does.

[oceanlovin'ea]

Florida

I did a merger a couple of years ago for my mother's s corp. We set up an LLC. You do have to get an EIN for the LLC. Then we filed out merger papers to merge her existing S corp with the LLC, leaving the LLC as the new company. The new EIN for the state is just really nothing but had to be done.

We filed Form 2553 for the new LLC.

What I did find out was that the state of Florida kept asking for a tax return for the LLC with the EIN that was registered. We had to send in a copy of the s status for the new LLC and then the state was satisfied since in Florida an s corporation doesn't have to file a state return. (Guess that is the reason we filed form 2553 for the new LLC)

But IRS will continue to use the original EIN.

Texas might have different rules for this. You could contact Beanna Whitlock with NCPE fellowship. She is in Texas and knows more about LLC's than you can imagine.

Linda, EA

[DaveinTexas]

You are correct about the election

Is it fair to assume that this only works if the LLC elects corporate treatment? Otherwise, wouldn't it have to be treated as a dissolution?

Is there a particular reason why the attorney recommended this? The one thing I can think of is that, in most states, an LLC doesn't have to be as meticulous in holding annual meetings and maintaining corporate minutes as a true corporation does.

I re-read the Letter Ruling, here's the site: Ltr Rule 200528021, and you do have to file the election form for the new LLC to be taxed as an S Corp. But everything I've read states you do not have to obtain a new EIN (which makes the filing of the 2553 seem redundant). I think I might file the 2553 along with a statement of what we are trying to accomplish.

The main reason for converting, from the attorney's standpoint, is to eliminate the formalities as you mentioned as well as creating firmer legal protection from creditors. LLCs have a charging order protection that Corporations do not. If a judgement is attached to the taxpayer's assets (one of which is the taxpayer's ownership in his LLC) a creditor wouldn't have the power to liquidate his company. All the creditor would receive is a charging order (first rights) to the distribution of profits. At this time, all the taxpayer would have to do is possibly raise his salary to reduce profits or choose not to distribute profits at all so all the creditor receives is a K-1 reporting taxable profits and nothing in box 16D!! K-Oed by the K-1 as the people in the tax seminars like to say.

I did address to the attorney that the charging order provision may only exist with multi-member LLCs but he assured me, in Texas anyway, that this provision does apply to single member LLCs, which this entity will be.

I'll give you guys updates as to how the election is received by the IRS.