Discussion:Convert LLC taxed as a Partnership to Sub-S
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Discussion Forum Index --> Tax Questions --> Convert LLC taxed as a Partnership to Sub-S
7 March 2006 | |
| I have a new LLC client with only losses so far who has been filing as a Partnership. The company is not a personal serviced corp., and the better choice would have been to file an "S" Election. I am considering filing one now for years beginning in 2006. What pros & cons should I look for? | |
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| 7 March 2006 | |
| This is probably elementary for some, but new to me. My resources are limited, so any help would be appreciated. | |
| 7 March 2006 | |
| ?? Call me confused and old school. But an LLC is a 1065 filer, unless it's a single member Sch. C filer. So why would you file an S election? And what advantage do you think that would give you? I love S's, but in your case, if you elected to treat the LLC as a corp and filed the S election, with losses...you'd be restricting the ability to take the losses. In an S, the loss limits are stock basis and direct shareholder loans. Only. In the partnership, loss basis is all the debt of the business, assuming that the owners are responsible for it...
Knowing that, can you now clarify your question? | |
| 7 March 2006 | |
| Since the IRS doesn't recognize LLCs, they can choose to be taxed as either a corporation or partnership. If only a single member and you don't choose to be taxed as a corporation, then you become a Sch. C filer. That's because to be a partnership, you need at least 2 partners. If you choose a partnership, all income is self-employment income. If you choose a corporation, you can elect "S" and have all the benefits of an S-Corp. My client has two Members. One is actively involved in the business and the other isn't. The business isn't anything like a personal service company. It's more like a regular corporation. The member who is involved in the operations is more like an employee and a owner. If I change to an S-Corp, I can pay him wages, and then his share of any profits will not be subject to Self-Employument Taxes. If you are familiar with S-Corps, you know how this works. For now, I am more worried about how to handle the prior losses and gains. After 2005, there will be a small cumulative gain since inception. | |
| 7 March 2006 | |
| Ah, now the info comes. Well, I think you're not completely correct. First off, filing the 1065 does not obligate ANY of the income as self employment income. Indeed, as the regs now stand, believe it or not, by definition, an LLC member is a limited partner and therefore NONE of the income is subject to SE unless you want it to be. Check it out, this is true. Now, we don't want to get whacked in an audit, and we know the warpath IRS is on over reasonable comp in S corps. So the smart thing is to treat some portion of the LLC income as guaranteed payments, which are subject to SE taxes, based on what a reasonable salary is. Since you've got one silent partner and one working partner, you'll have trouble capitalizing the S corp to boot since presumably one has the money and the other doesn't. So when you try to capitalize the non-money's stock...you just created income. And Sec. 751 (?) requires that all the assets must roll over, so you can't just pick and choose to get the stock balanced.
So, I'd stick with the LLC/1065 (And IRS does NOT disregard the LLC, it presumes a 1065 unless you pick differently), make some guaranteed payments for the working partner, and avoid SE taxes on all the rest. | |
| 7 March 2006 | |
| Thanks, Both Memberes have about the same invested. Do you still think it has to be a "guaranteed payment", or just as long as Member receives a reasonable salary for his services? | |
| 7 March 2006 | |
| I'm interested in definition you have of an LLC member as a limited partner. If the member participates in the business how can you define it this way? I'm interested in references please 'cause this is hotly debated in our firm! Thanks. | |
| 7 March 2006 | |
| See:
IRS Proposed Regulations: REG-209824-96, January 13, 1997. INTERNAL REVENUE SERVICE NOTICE OF PROPOSED RULEMAKING AND PUBLIC HEARING (REG-209824-96) ON DEFINITION OF LIMITED PARTNER FOR SELF-EMPLOYMENT TAX PURPOSES, ISSUED JAN. 10, 1997 A summary of the BNA Tax Practice Series discussion is: The IRS issued the proposed regs, they caught political fire and Congress passed a resolution to have Treasury withdraw the proposed regs and imposed a moratorium on issuance of final regs until after 7/1/98. The moratorium expired, Congress didn't act and the IRS has taken no subsequent action. Thus, in a way, LLC members are in a no-man's land. Treat them as limited partners if you dare. But follow the proposed regs if you don't care to get penalized. Those regs would say that an individual will be treated as limited partner for SE tax unless the individual (1) has personal liability for debts, (2) has authority to contract on behalf of partnership, or (3) participates in the partnership's trade or business for more than 500 hours during the year. | |
| 7 March 2006 | |
| 'Zactly. Thanks Jdugancpa....
So, no, I'd stick with guaranteed payments to establish the reasonable salary for the working partner and skip SE on all the rest of the profit. Legitimately. | |
| 10 March 2006 | |
| This is interesting, however, the application of what Jdugancpa had mentioned is standard partnership tax issues not segregated just because one is an LLC partnership. Limited Partners in a partnership whether that is an LLC or not can(or used to) limit SE tax. LLC designation is a state law. An LLC for tax purposes can be taxed under partnership laws (which apply to all partnerships). IRS/Congress has not segregated LLC's from basic tax regs. One is either Sole prop, partnership, C Corp, or S Corp. This is my understanding of the application of LLC's for tax purposes. | |
| 22 February 2008 | |
| This is the first time I use this page.
Does anybody know if an LLC who has been taxed as a partnerhip since its formation can elect to change and be taxed as a corporation? | |
Wgreddencpa (talk|edits) said: | 9 January 2009 |
| I know this discussion occurred nearly a year ago, but I stumbled upon it looking for an answer to another question. My question is for JR1, if still around or anyone else who knows. How do you book this guaranteed payments transaction on the books? I assume once done the result will flow without further adjustment to the tax return. I can debit 'guaranteed payments', which obviously reduces net income, but what does the credit go to? It seems to me I'm back in the same situation. Also, how do you elect NOT to treat all partnership profits as SE income? Your assistance is greatly appreciated.
Thanks | |
| 9 January 2009 | |
| and guaranteed payments DO reduce income (to the members/partners not receiving them), WgreddenCPA, they are accounted for seperately on the K-1 | |
| January 9, 2009 | |
| Credit their capital accounts, where the final profits get distributed. Total income is the same to the partner/member, but the net on the company is lower, since the guarantee works just like a salary. | |
Actionbsns (talk|edits) said: | 10 January 2009 |
| Whatever happened to Albundy? Did he return to his sales career as a shoe salesman? Did he finally unload his deadbeat kids? and what about that wife? Suppose she ever learned to cook? | |
| 4 November 2009 | |
| My question goes back to something JR1 said earlier in this post:
"So the smart thing is to treat some portion of the LLC income as guaranteed payments, which are subject to SE taxes, based on what a reasonable salary is." And to what Jdugancpa said: "Those regs would say that an individual will be treated as limited partner for SE tax unless the individual (1) has personal liability for debts, (2) has authority to contract on behalf of partnership, or (3) participates in the partnership's trade or business for more than 500 hours during the year." My understanding is that if you are a partner, and you put in over 500 hours, isn't all of your net income subject to SE tax? Thanks | |
| 4 November 2009 | |
| Thanks LH2004
I guess it all comes down to who qualifies as a limited partner and who doesn't. I found the following link somewhat helpful: http://www.lgclaw.com/pub_wishbone.htm | |
| 24 August 2010 | |
| Seems this discussion revolves around the SE tax issue. Upon converting an LLC, taxed as a sole proprietor/partnership, to being taxed as an S-Corporation - seems the unrealized receivables would become immediately taxable, if the converting entity was on the cash basis. | |
| 24 August 2010 | |
| I do not see any reference to unrealized receivables in any of the above facts - but my LLC client that wishes to convert has significant unrealized receivables. Any thoughts? | |
| 24 August 2010 | |
| FYI, JAB, when you do a search on TaxAlmanac, the discussions at the top of the search results are the ones started longest ago. So be sure to continue reading - and for best results, start at the bottom of the search results and read up. Here are some Hints and Tips on How to Search on TaxAlmanac, and since you're new to the site I'll put some other helpful links on your talk page. | |
