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.

This drove them into the weeds of IRC 708 pertaining to the merger of two or more partnerships. Fortunately they came to me and turns out the main concern here is converting the legal form of the businesses from LLCs to a corporation which can require a state licensed business attorney.

Keep in mind however, the husband/wife converted each of their LLC’s tax status from a partnership to a corporation without changing the LLC’s legal form in Colorado. As such they only needed to:

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