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socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 37959
Experience:  Retired (mostly)
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I have a C-Corp with 3 other shareholders. The other

Customer Question

I have a C-Corp with 3 other shareholders. The other shareholders are non-US resident entities. We have a new product that we'd like to launch as a separate company. Our C-Corp would own 40-60% of this new entity. My question is; I know that if we launch this new entity as C-Corp it would be double taxed for capital gains in case of a sale of the subsidiary company (new entity). What happens if we form this new entity as LLC or S-Corp, would we still be double-taxed in case of a change of control as a result of merger or acquisition. Please advise for both US-resident and non-resident shareholder of the C-Corp perspectives,
Submitted: 3 months ago.
Category: Business Law
Expert:  socrateaser replied 3 months ago.

Hello,

1. Under U.S. tax law, an S corporation cannot be owned by a C corporation -- so this isn't an option.

2. An LLC is a pass-thru entity. If a C corporation owns a share of the LLC, and the LLC is sold, then the owners of the LLC would share directly in the profits, which would be passed-through to the C corporation. The gain on sale of the LLC would be taxable to the C corporation, and it would be up to the C Corporation directors to determine whether or not to pay out some of those gains as dividends.

3. The means by which to avoid the double tax on sale would be to operate the new product under a division of the existing C corporation, and then "spin-off" that division as an asset of the C corporation. If there is a concern about limiting liability by having a separate business entity, then the option is to suffer the additional gain on sale, or purchase liability insurance to cover the potential liability cost (which would probably be less than the tax liability -- but, that's a question to determine with your insurance agent and tax professional [CPA, tax attorney, etc.]).

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, I receive nothing for my efforts in your behalf.

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Expert:  socrateaser replied 3 months ago.

Hello again,

I see that you have reviewed my answer, but that you have not provided a rating. Do you need any further clarification concerning my answer, or is everything satisfactory?

If you need further clarification, concerning this matter, please feel free to ask. If not, I would greatly appreciate a positive feedback rating for my answer (click 3, 4 or 5 stars) – otherwise, I receive nothing for my efforts in your behalf.
Thanks again for using Justanswer!