LLC - S Corp

[S T]

I have a new client commencing Oct 2011 - set up an LLC and is electing S corp Election -- Have to Love the DIY'ers

Members

1) 51% - Spouse Married to # 2 and Mother of # 3
2) 24.5% - Husband of # 1 and Father of # 3
3) 24.5% - Son of @ 1 and # 2

State of Texas

Member 3 is to participate in all gain/losses However, with S Corp Election you can not do that - right?

And with S Corp Election, they need to implement payroll for each and have equal distributions according to %

2011 shows a loss - so I do not necessary have an issue with 2011, So now the question - moving forward in 2012 and making corrections

Client, is thinking to re-align Member 1,2,3 to only 2 Shareholders (change to S Corp - Remove LLC -) at 50% each, we will set up payroll, then each will participate accordingly in 50/50 gain/loss and the matching distributions.

What tax impact/consequences are there for removing Member 1 at 51% and re-aligning Member 2 and 3 to 50/50 Shareholders?? Seems like there would be a Member % sale and show gain/loss for Member 1

Is there a reporting issue changing from LLC to S Corp? Will we have to re-apply for EIN# etc?

Does someone have an easy outline/solution for this??

Thanks

Sandy

[Koss]

S Corp

Member 3 is to participate in all gain/losses However, with S Corp Election you can not do that - right?

With an S corp you cannot have "special allocations," i.e., you can't have an agreement where a guy who owns a 30% interest in the company gets 35% of the profits.

But it's not clear what you mean when you say that "Member 3 is to participate in all gain/losses."

And with S Corp Election, they need to implement payroll for each and have equal distributions according to %

A member only needs to be on the payroll if that member is actively working in the business. If a member is only an investor, then they don't belong on the payroll.

It is possible for someone to be an "investor" only without actually putting any money or assets into the company. For example, a husband who forms an LLC can transfer an ownership interest to his wife, so that she becomes an owner, or passive investor, without working in the business, and without contributing any capital. This type of gift may have other, unintended consequences, but it can be done.

Is there a reporting issue changing from LLC to S Corp? Will we have to re-apply for EIN# etc?

Generally, you don't need a new EIN.

How has the return been filed in previous years? Have they been filing it as a partnership, on Form 1065?

Why do they want to make the S election?

If they make the election now, it won't take effect until January 1, 2013 (assuming they are on a calendar year). Or did they already make the election, before March 15, 2012?

BMK

[Koss]

Election

In my comments above about when the election becomes effective, I assumed that they had already filed a return for an earlier year.

In re-reading the original post, it appears that 2011 may be the first year that the business is filing a return, i.e., the LLC was formed in 2011 (or formed in an earlier year but did not begin doing business until 2011).

If that is the case, then the date of the election may not be an issue. They can generally qualify for the "late election relief."

BMK

[Lion]

If more than 50% of a partnership changes, then the partnership dissolves. So, if the 51% partner is leaving, the partnership ends. If one of the 24.5% partners is leaving, you can move up the chain from partnership to corporation without as much tax impact as moving back down the chain.