Limited Liability Companies: An Interesting Tax-Reporting Entity
A state-registered limited liability company (LLC) can be taxed as a partnership for federal income tax purposes. However, its members, like corporate shareholders, are not personally liable for the entity’s debts or liabilities. Under the check-the-box rules, an LLC can choose partnership status to avoid taxation at the entity level as an “association taxed as a corporation.”
Unlike limited partners, LLC members may participate in management without risking personal liability for company debts. No limitations are placed on the number of owners (compare, a maximum of 100 shareholders for S corporations) or different types of owners of an LLC (S corporations may generally only have U.S. resident individuals or certain types of trusts as shareholders). Additional advantages over S corporations include the ability to make disproportionate allocations and distributions ( Code Sec. 704) and to distribute appreciated property to members without the recognition of gain ( Code Sec. 731(b)). Members may also exchange appreciated property for membership interests without the recognition of gain or loss ( Code Sec. 721).
Conversion from Partnership to LLC.
A conversion of a partnership into an LLC that is taxed as a partnership for federal income tax purposes is treated as a nontaxable partnership-to-partnership conversion. The conversion is treated as a contribution of assets to the new partnership under Code Sec. 721 and does not result in gain or loss to the partners. The tax results are the same whether the LLC is formed in the same state as the former partnership or in a different state. Upon such a conversion, the tax year of the converting partnership does not close with respect to any of the partners, and the resulting LLC does not need to obtain a new taxpayer identification number ( Rev. Rul. 95-37). [PART: 3,106.10 ].
Think about your preferred form of doing business and then come see us at IRS-SOLV and let us help you with tax entity compliance. Our staff is always ready to help develop your firm and establish the right form of doing business for you.