C-Corp Ownership Interest in LLC

[Outlook]

Potential new tax client has owned a C-Corp embroidery business for many years. A potential partner company has approached the owner with an offer to join forces. Together, the two companies would form a new LLC. I'm interested to know if anyone has had experience with a C-Corp being an ownership member of an LLC and whether they can identify any tax/accounting issues that could potentially be a problem.

The owner wants the C-Corp to be the owner of the LLC because the C-Corp evidently has some loss carryforwards and the plan would be to utilize the loss carryforwards against the pass through income from the new LLC coming into the C-Corp. Again, does anyone foresee a problem with utilizing the loss carryforwards to offset the LLC passthrough income?

Thank You!

Outlook

[Roland Slugg]

No problem

As long as the new LLC elects to be treated as a partnership, there is no problem. The LLC would be a "pass-through" entity, so its two members ... the C Corp and the other new individual ... would be its two partner/members. The LLC's income would pass through to those two members, via Schedules K-1, in proportion to each's ownership percentage. The income passing through to the C Corp would, just like amy other income, be available to be offset by that corp's loss carryover.

[Nashville]

If I read this correctly...

...the carryforward loss on the C corp would NOT roll into the S-corp. The S-corp would be on its own from its day of inception.

The S-corp, presuming it is profitable, would allocate income to the C corp. The income would be absorbed by the loss-carryforwards to the extent they exist.

Am I thinking correctly?

[Roland Slugg]

Am I thinking correctly?

No. The original post didn't say anything about an S Corp.

[BHoffman]

One problem might be the eventual double taxation of the LLC profits into the C-Corp after the carryforward losses are used up.

Also, the LLC is not free to make any SCorp election while having that C Corp as a member.

Another issue might be whether the C Corp is bringing any of its liability to creditors into the new LLC.

And I'd be doing some real due diligence on the other company to make sure it's clean before recommending my client to partner up.