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A direct contribution from a corporation to a partnership is tax-free assuming the minimal requirements of sec. 721 are met. You then have the corporation as a member of the partnership ... but but there is no tax free conversion out of a corp to anything. One way road. Out means taxable recognition of gain...the deemed sale of assets.
Also remember that the § 721 transaction may not be as good as it sounds; At the end of the day, the corporation will own an interest in a partnership. The partnership assets cannot be distributed to the shareholders of the original corporation without triggering gain recognition at the corporate and shareholder levels.
Ofe last thing about some f the simple conversions out there in many states, ... just because oyur state may offer a certificate of conversion (or a statutory conversion) it doesn't change the tax ramifications: HOWEVER, the tax law doesn't work that way. You still have to go through all the steps, even if you have an LLC that is changing from corp status to partnership/disregarded status or vice versa. (See the(NNN) NNN-NNNN3(g) regs for examples.) Or you can use Sec. 721 or 351 to transfer assets from one entity to another in exchange for an interest in the new entity with no tax consequence -- BUT THE REAL ISSUE HERE? ... the original owner still has that built-in or deferred gain to deal with if it wants to get the assets out.
It's either be a deemed sale, or under section 721 the Scorp can own the LLC interest, but that gain will still be there for the Shareholdert
Here's a pretty good article about it: http://money.cnn.com/2008/04/09/smbusiness/scorp_or_llc.fsb/
From there: "
The IRS will treat any conversion as a liquidation of the S-Corp. for federal income tax purposes, Perris says. So, if the assets of the S-Corp. have increased in value during your two years in business, the increase will be taxable to the shareholders - most likely as capital gains.
Make the LLC-conversion only if the increase in value of the S-Corp. is small or nonexistent, so that there will be little or no tax liability, Perris says."
You have given me much to think about. The S corp is simply a married couple, wanting to move it to an LLC and to not be an S Corp anymore
Good... it IS less complcated to administer, going forward, but there's a price!
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Being real estate only, there may only be a small amount of appreciation...but what about the recapture of deprecation, that would still be a gain. And YES I will rate you highly.
OH, sorry I see you're typing ... I'll wait
You nailed it ... If the FMV was really lower? then it might wash out
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Lane, would this all be treated the same way if the S corp was a merger into an LLC? The S Corp is a married couple, no other shareholders, and the LLC would be the same.