Our company is currently organized as an LLC
, but have elected S-Corp status for tax
purposes. We are in the midst of buying one of the unit holders of the company out. He has agreed to carry back a note for the purchase price. We are now wondering though whether we should convert to a C-Corp prior to doing so.
The reason for this thought process is that we have been approached by a Venture Capital firm that is interested in making a possible investment. In all likelihood, they would require that we convert from an LLC to a C-Corp prior to investing. The conversion is fairly straightforward from a legal standpoint (we are organized in Colorado and the Corporate and LLC statutes allow for a conversion without having to actually form
another company and merge companies).
Since I'm not an accountant (but I am an attorney), I was unsure on whether we should be concerned about any potential tax liability
? My preliminary research indicates that we may face a tax liability if we what to perform the conversion at a later date. The reason (or at least my understanding of current tax laws
) is that we would be taxed on the difference between our liabilities
. The note the other owner has agreed to carry back for the purchase price would be a liability on our books and we don't have enough assets to offset the liability. Is my understanding correct? Does the outcome change at all since we are currently taxed as an S-corp rather than a partnership
? Thanks for any clarification you can provide.