Discussion:Transfer ownership of LLC by individual to that of a Corporation
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Discussion Forum Index --> Tax Questions --> Transfer ownership of LLC by individual to that of a Corporation
| 19 November 2009 | |
| A client currently owns an S-Corporation which is used solely as a holding corporation for a couple of single-member LLCs, in which the S-Corporation is the single owner of each. For federal taxation purposes, the LLCs are disregarded entities and one return is filed for the S-Corporation. He also owns a single-member LLC outright, with himself as the sole owner (sole-proprietorship). He would like to transfer ownership of this LLC to be owned by the S-Corporation just as the other LLC entities are. The state in which the LLC is organized will be notified via amendment of the change of ownership. however, my questions are as follows:
1) How must the IRS be officially notified of this ownership change? 2) Must a new EIN be applied for? 3) Does this entity need to be sold to the S-Corp, or can it just be transferred? Thanks very much for any assistance in this matter. | |
| 21 November 2009 | |
| For Federal tax purposes, wouldn't this be treated as an IRC §351 transfer since the LLC is transferring its assets and liabilities to the S corporation? If so, the reporting requirements are addressed in Treas. Reg. §1.351-3. | |
Harry Boscoe (talk|edits) said: | 21 November 2009 |
| Or is the owner/member of the LLC contributing his membership interest in the LLC to the corporation? I'm gonna guess that the end result is the same for income tax purposes, but that the documents would be distinctly different depending on which "transfer" was being done. Maybe there would be legal questions about liability that would depend on which "transfer"...
Could this be done without "documents"? | |
| 21 November 2009 | |
| I think you can transfer either the assets and liabilities or the LLC interest to the S corp in exchange for stock under IRC Sec. 351. Look at the regs Dave referred you to. No new EIN, no need for a sale, no gain or loss recognition, no change in the basis of the LLC's assets. Reg. Sec. 1.351-3 will give you all the information about what needs to be filed with the IRS. | |
| 25 November 2009 | |
| Harry,
You are correct in that they are simply transferring his 100% member interest in the LLC to the S-Corp that he now has a 100% interest. Any idea what the correct method of notifying the IRS would be? | |
| 25 November 2009 | |
| The transferor shareholder, in a Code Sec. 351 exchange, must file a statement with his tax return for the year of the exchange.
The statement must include the name and employer identification number of the transferee, the date of the property transfer, the aggregate fair market value and basis of the transferred assets, and the date and control number of any private letter ruling issued by the IRS in connection with this exchange. The transferee must also file a statement with his tax return (attachment to sch C) for the year of the transfer. That is the way to notify the IRS of the transfer. The Reg. mentioned above gives you more than enough information in regards. | |
Harry Boscoe (talk|edits) said: | 25 November 2009 |
| It's been a long time, but as I remember it, Section 351 applies whether or not the "required" statement is filed with the return, and there's no penalty for failure to file the "required" statement.
Am I hallucinating, misremembering, or otherwise showing my age and related memory deficiencies? Is there quite simply no downside to *not* attaching all this information to the affected return(s)? Has anybody here been challenged on this? | |
| 26 November 2009 | |
| After the amendment they made to 351 in 08 or so it looks like a pretty simple statement that needs to be added on to the tax returns of the transferor and transferee. One issue is that the S-corporation taking ownership of the LLC isn't really worth anything yet, so I'm not sure how much stock they'll have to issue in exchange for the transfer of ownership and assets. Assets are about 15k in Cash, 35k in Inventory. Any ideas? | |
Harry Boscoe (talk|edits) said: | 26 November 2009 |
| Non-tax caveat: If the corporation's stock is exchanged *for the assets* of the LLC, rather than for the individual's interest in the LLC, there's going to be a moment in time when the owner isn't protected from liability for *whatever* by the assets being in the possession/title/ownership of the LLC... Is there a whole bunch of value here that's *not* on the books of the LLC, like is this a really successful business, and are there potential liabilities and should the careful advisor be very aware of any transaction that exposes the owner/individual/taxpayer/client to a liability that he might otherwise avoid? IANAL | |
