An Limited Liability Company (LLC)
is created by filing the Articles of Organization with the Secretary
of State (similar to corporation and limited partnership formations). The
operating agreement should detail the nature of the management and
limitations on duration and transferability of membership interests.
States charge a filing fee for creating a Limited Liability Company (LLC). The fees vary from state to state. Some states impose an annual
Limited Liability Company (LLC) filing fee on a per member basis to offset the loss of revenue from
corporate franchise taxes. Other states tax Limited Liability Company(s)
(LLCs) as corporations even
though they qualify to be taxed as a partnership for federal tax purposes.
Conversion Of An Existing Business
Converting an existing partnership to a Limited Liability Company (LLC)
is a tax-free event as long as the conversion does not result in a
shift of partnership liabilities among the members [Revenue Ruling 95-37].
Converting an existing corporation to an Limited Liability Company (LLC) is a taxable event under the
normal liquidation rules of a corporation.
Revenue Ruling 95-37 indicates that the
conversion of a partnership into an Limited Liability Company (LLC), or vice versa, is treated the
same as a conversion of a general partnership into a limited partnership,
as described in Revenue Ruling 84-52.
Revenue Ruling 84-52 states the following:
• No gain or loss is recognized by the
contributing partners in exchange for an interest in the new partnership.
• No gain or loss is recognized by the
new partnership upon receiving a contribution of capital in connection
with a conversion of one interest for another.
• A contribution of property to the new
partnership is not considered an exchange giving rise to a termination of
a partnership under Section 708, regardless of whether more than 50% of
the partnership interest was converted within a 12-month period.
• Adjusted basis of a converting partner
is not affected by the conversion unless the partner’s share of
liabilities is changed.
• A shift in partnership liabilities is
deemed to be a distribution of money to the partner. If it exceeds the
adjusted basis of the partner’s interest, gain would be recognized.
• Holding period of a partner’s
interest does not change upon conversion.
• Partnership’s tax year does not close
upon conversion; unless there is a sale, exchange, or liquidation of a
partner’s entire interest as described in IRC §706(c)(2).
• The new partnership (Limited Liability Company (LLC)) does not need to
apply for a new taxpayer identification number (TIN). (Some financial
institutions still attempt to require converted Limited Liability Company (LLCs) to obtain new TINs.
If this is the case, have several IRS Letter Rulings on hand such as
9501033 or 9432018 which state that the converted Limited Liability Company (LLC)
is not a termination
but a continuation of the partnership.)
First Tax Return For Converted Limited Liability Company (LLC): The
first tax return for the converted Limited Liability Company (LLC) is due at the same time the
partnership’s return would have been due had there been no conversion.
The first Limited Liability Company (LLC) return also combines all partnership and
Limited Liability Company (LLC) items for the
year of conversion and reports the items to the members (former partners)
as if there had been no conversion.
