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What are the tax consequences to converting an S corp to an

LLC. The S corp...
What are the tax consequences to converting an S corp to an LLC. The S corp contains 7 rental properties, and that is the only assets.
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10/23/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,876
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane :

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.

Lane :

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.

Lane :

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.

Lane :

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

Lane :

Here's a pretty good article about it: http://money.cnn.com/2008/04/09/smbusiness/scorp_or_llc.fsb/

Lane :

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."

Customer:

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

Lane :

Good... it IS less complcated to administer, going forward, but there's a price!

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only way they will pay us here.

Lane :

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer:

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.

Lane :

OH, sorry I see you're typing ... I'll wait

Lane :

You nailed it ... If the FMV was really lower? then it might wash out

Customer:

Thank you, XXXXX XXXXX my first experience with this service and I found it to be very helpful.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,876
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane and 87 other Tax Specialists are ready to help you
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Thanks so much Dee!

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question


OR set me up as your preferred expert on your home page.


Regardless, thanks again,

Lane

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Customer reply replied 4 years ago

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.


Yes, Dee,

In Indiana, there's a relatively new, simplified procedure that allows conversion from a corporation to an LLC largely by filing a few basic documents with the Secretary of State.

This procedure, technically known as “statutory conversion,” automatically transfers the corporation’s assets and liabilities to the new LLC.

Unlike other methods of conversion, only one business entity is involved: you do not need to separately form an LLC before the conversion can occur.

And, there's no need to dissolve your corporation.

With Indiana’s conversion statute, the business is considered to be the same entity “without interruption..."

The conversion procedure is codified primarily in Sections 23-1-38.5-10 through 23-1-38.5-16 of the Indiana Code (Ind. Code).


But the Federal tax implications are the same. You'll have to successfully 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 built n gain will still be there IF that flies, and will have to be dealt with when assets are sold.

The way Indiana does this should help insulate.


Lane
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Lane
Lane
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