(Per visitor request this is an excellent article we are re-posting from TaxConnections Member John Dundon)
Recently a husband/wife owned 3 LLC’s that each successfully elected to be treated as S-corporations for federal income tax purposes by filing IRS Form 2553 – Election by a Small Business Corporation. Subsequently this great couple found themselves entertaining a rather complicated buyout offer of all 3 of their LLCs. This post addresses the tax implications of converting an LLC to a Corporation as part of a buyout strategy…
Their fundamental question:
Can the LLCs do a tax deferred corporate reorganization under IRC 351-368?
The husband/wife were concerned that their LLCs electing S corporation status might not be able to engage in a corporate reorganization because the LLC’s were comprised of ‘member interests’ and they did not have any “stock” – which is a key term in IRC 368 governing statute.
A Limited Liability Company (“LLC”) is a hybrid business entity which contains elements of a partnership and a corporation. LLCs consist of members and managers. An LLC may provide tremendous benefits for its members, which include asset protection, intergenerational transfers, tax saving strategies, wealth preservation, flexible management structures, and clarity on the roles of all essential parties involved in the company as set out in the Operating Agreement.
The following five concepts are fundamental for establishing an LLC: Asset Protection, Intergenerational Transfers, Tax Saving Strategies, Management, and Funding.
Generally, the more assets a person owns in one’s name, the more likely it is that he or she will be a target mark for creditors. This is why it’s good practice to own as little as possible in your own name. In order to accomplish this goal, it’s important to evaluate the types of asset protections tools that are available to you. An LLC is one such tool that is effective for asset protection purposes.
For creditors of the LLC itself, a member’s personal liability will generally be limited to the amount of the member’s investment in the LLC unless the member personally guarantees the transaction in question.
For most new businesses and business owners, keeping it simple is key. After all, launching a new business requires attention to detail and doing many things right. For that reason, most new businesses start out simply as a sole proprietorship or a Limited Liability Company (LLC). As a successful business matures, however, the savvy owner should call time out to consider the S Corporation form of business.
The owners of an active business operating as a S Corporation enjoy a distinct tax advantage over other types of tax entities, particularly sole proprietors, partnerships and LLCs. For the owner of a profitable sole proprietorship, partnership or LLC, the earnings are subject to both income tax and the 15.3% self-employment (SE) tax, which funds Social Security benefits and the Medicare health system. This SE tax is often unanticipated, particularly for new entrepreneurs, and can cause havoc with cash flow at tax time. Read More
Are you a non-US person with a US LLC? Then you need to be aware of the major new US reporting requirement for foreign-owned LLCs. The deadline is coming up soon.
Previously, foreign-owned single-member LLCs enjoyed an exemption from US tax reporting requirements. Starting with the 2017 tax year however LLCs that are wholly owned by foreign persons and did not elect to be treated as corporations for tax purposes, are subject to new IRS reporting requirements. Read More
Some states have created a novel and extraordinarily flexible type of entity called a “Series LLC”. Seven other states currently have this entity namely, Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee and Utah.
Briefly, a series LLC is an LLC whose company agreement establishes one or more LLC substructures called a “Series,” each of which has a statutory “internal liability shield” that protects it from claims against other series and from claims against the LLC itself. Read More
I. Single Member LLC Asset Protection
A Debtor argued that the Bankruptcy Trustee acts merely for her creditors and is only entitled to a charging order against distributions made on account of her LLC member interest. However, the charging order exists to protect other members of an LLC from having involuntarily to share governance responsibilities with someone they did not choose, or from having to accept a creditor of another member as a co-manager. Read More
Many US entrepreneurs set up an LLC in the beginning, because it is straightforward and not too expensive. Generally, this is a good approach for the start as LLCs offer liability protection and other advantages. However, entrepreneurs are often not aware that with increasing income, switching from LLC to S Corp makes financial sense.
Why you should consider switching from LLC to S Corp
As your income from your LLC increases, so does the self-employment tax. You earn more, you pay more tax, but your ability to contribute to retirement accounts does not change. This is where converting the LLC to S Corp has advantages. Read More