LLC/Partnership into a Corporation

[Lion]

LLC taxed as a partnership, husband and wife, want to incorporate. Can they make it retroactive to 1 January 2008? Does the partnership contribute all its assets to the corporation. Or, does it dissolve, distributing to partners who then contribute to corp? Lawyer wants the old LLC to own the new S. TTB 19-3 lists ineligible shareholders as partnerships and single-member LLC if elected to be taxed as a corporation, but is silent on multiple member LLC ownership of an S. In short, what are the tax implications of an LLC/partnership forming an S-corporation. Haven't had a client change entity before, just an individual to an LLC or S, but not an MMLLC to an S.

[veritas]

From TTB

S Corporation Formation
An S corporation is formed in the same manner as any other
business corporation. A corporation may be formed under state
law, or an eligible non-corporate entity may elect to be taxed as a
corporation. Whether the entity formed under state law, or made
the election to be taxed as a corporation, the entity must file Form
2553, Election by a Small Business Corporation, to elect S corporation
status.
Most non-corporate entities must file Form 8832, Entity Classification
Election, to elect to be taxed as a corporation. However, an
eligible entity that files Form 2553 is considered to have made an
election to be taxed as a corporation without filing Form 8832. See
Form 2553, Election by a Small Business Corporation, page SB3-4.

[Lion]

Llc

So, the LLC can transfer all its assets in a tax-free exchange for stock in the S-corp? Or, is an LLC ineligible to own stock in an S? I realize that many of the things people like in LLCs are the same things people like in S-corps, so I haven't had a client or even heard of anyone going from an LLC to an S or the other direction.

[veritas]

I never thought of it as a tax free transfer

exactly. What I have referenced in TTB is making an election for the LLC to be taxed as a corporation.

It would appear you would file a 1065 for the year preceding the election to be taxed as a corporation and a 1120 or 1120S in the electing year. So the ending numbers from the 1065 would be the beginning numbers for the corporate return.

I would assume your partnership was filed on a calendar year so you still have time to make the election effective for the first of this year.

[Matt Sova]

LLC as an S-Corp

Client has an LLC.
Previously this was taxed as a partnership.
For 2008 they want it to be taxed as an S-Corp.

Client files for 2553 prior to 3/15/08 electing S-status as of 1/1/08. The name of the company will be XXXXX, LLC because the business legal structure does not change. It will NOT be a corporation for state legal purposes, however it will be taxed as an S-Corp.

This is a tax free change. The balance sheet will just continue rolling along with no changes.

If it is after 3/15/08 then they could still elect back to 1/1/08 under the appropriate Rev. Proc.

[Lion]

Client wants that INC after his name

Thanks to Veritas and everyone. Trouble is, the client wants to be XXX, Inc., instead of his current XXX, LLC. I know, but it's what he wants. Lawyer's pushing for S. Since he's just incorporating now and then making the S election, can he still make it effective 1 January? And, question #2 is really how do I make this happen on paper? LLC contributes everything to new corporation? But, an LLC can't be a shareholder in an S. I'm in over my head on this one. In fact, I think he's taking in so much money that we have to switch to accrual now; but that's a whole 'nother thread !!!

[Matt Sova]

Inc instead of LLC?

Why in the world would he want this? With a corporation you "have to" have annual meetings and minutes (not that everyone does). With an LLC you do not. With a corporation the corporate shield can be pierced if it is thinly incorporated. With an LLC you do not have this problem.

If they insist on changing the legal structure to a corporation (stupid idea) then it would be a tax free reorganization from a LLC-partnership to an S-Corporation. Balance sheet would carry over just as though they were doing it the easier, more correct way. Election can be effective as of 1/1/08 even though the articles are not filed until February.

It was either this board or the QF board that someone argued that last point with me, but they were wrong. You can file the articles at any point and retroactively elect to 1/1 the S-Corporation.

[Lion]

Thanx, Matt

Thank you very much, Matt. I've talked 'til I'm blue in the face, but he wants Inc after his name. I'd always thought that you could go up the entity chain tax-free (just coming back down triggers tax consequences, dissolutions, etc.). Good to hear that balance sheet will just transfer over. And, the 1 January had me worried, since he wasn't a corp then, but he was organized in CT as a MMLLC which can elect S, so... Thanks for helping me get a grip on what he's going to do will do to me!