Distributions of an LLC which is taxed as corportion

[Norma Bruce]

Taxpayer gifted cash and rental property to an LLC, which is taxed as a corporation. The members of the LLC would now like to distribute some cash out of LLC. Can they do this as return of capital (tax free)?. Would their basis be the same as gift to LLC?

[ChEAr$]

Taxpayer gifted cash and rental property to an LLC, which is taxed as a corporation. The members of the LLC would now like to distribute some cash out of LLC. Can they do this as return of capital (tax free)?. Would their basis be the same as gift to LLC?

The original entry on the LLC books should have been debit appropriate assets and credit "member account", i.e. that person's capital account.

Read a copy of the operating agreement to see any restrictions on a member for withdrawing cash out of his member account.
There is no such thing as a gift to an LLC, rather it was a contribution to capital at that time.

The organization may be taxed as a corporation, but it is still an LLC, and state laws govern, along with the operating agreement.

[JON]

Really

I am not sure, but what I heard was if you elect to be taxed as corporation that is what you are treated as. You have retained earnings(loss). Need some more input here. I did not think you could say I want to be a corporation here, but an LLC here.

[Burke]

Need some more input here. I did not think you could say I want to be a corporation here, but an LLC here.

I think you can. An LLC is organized under state law as an LLC. It can "make an election to be taxed" as a corporation. That doesn't mean it becomes one under state law. If that were true, it would have organized as a corp to begin with.

[Hamacher]

Clarification

I am not sure, but what I heard was if you elect to be taxed as corporation that is what you are treated as. You have retained earnings(loss). Need some more input here. I did not think you could say I want to be a corporation here, but an LLC here.

Is it taxed as an S Corp or C Corp? BTW - You should NEVER put real estate into a Corp. You should advise them to set up a new LLC to put the real property in.

[JON]

Who is sure

If you are electing to be taxed as a corporation there is no abiility to withdraw equity otherunless it is a liquidation or taxable dividend. When you "elect to be taxed as a corporation" it means you are a corporation for federal and I think all/or most states it is valid there also. I think we still need more information.

[John of PA]

If it's taxed as a C Corp, you will pay double tax someday if you sell the Real Estate and distribute out the proceeds to the shareholder.

[ChEAr$]

If you are electing to be taxed as a corporation there is no abiility to withdraw equity otherunless it is a liquidation or taxable dividend. When you "elect to be taxed as a corporation" it means you are a corporation for federal and I think all/or most states it is valid there also. I think we still need more information.

Jon, where does it say that in federal tax law?

[JoshinNC]

Subchapter C

Jon, where does it say that in federal tax law?

That's where.

[JON]

C Corp

for withdrawals, other than payment of loans has always been that way. Excess dividend withdrawals which has created negative retained earnings are recorded as return of capital and 1040 Schedule D transaction and make sure 1120 answers yes to the question.

Again I do not think you can elect to treated as a corporation for some things, but say I am a LLC for other things. If you can show me in the code where it says that I will have to change my thinking... Attorneys love to have an LLC elect to be taxed as an S Corp. They believe the savings on FICA is worth it. I have never seen real estate rental activity electing into corporate status.

[ChEAr$]

I never use an account title "retained earnings" for an LLC. An LLC is simply not a corporation, although as we know it may elect to be taxed as one.
Accordingly, at year's end, profits (we hope) are allocated to members' accounts. Any distribution from those accounts could be likened first to a redemption of stock up to the initial amounts, but thereafter taxed as dividends, assuming the election is that of a C corp.

So, if ever have such an LLC electing C corp treament, two member's accounts need to be set up in chart of accounts:
Members' contributions for original capital contributions, and Members' earnings (similar to retained earnings of a regular corp.)

[JoshinNC]

While, for bookkeeping purposes,

I never use an account title "retained earnings" for an LLC. An LLC is simply not a corporation, although as we know it may elect to be taxed as one.
Accordingly, at year's end, profits (we hope) are allocated to members' accounts. Any distribution from those accounts could be likened first to a redemption of stock up to the initial amounts, but thereafter taxed as dividends, assuming the election is that of a C corp.

So, if ever have such an LLC electing C corp treament, two member's accounts need to be set up in chart of accounts:
Members' contributions for original capital contributions, and Members' earnings (similar to retained earnings of a regular corp.)

an LLC taxed as a C Corp may have respective Member's accounts. Once they've made the decision to be taxed as a C Corp they will in fact have retained earnings for tax purposes.