Discussion:Convert from C corp. to LLC

If its going to be taxed as corporation then I see no problem - would be F reorganization I believe.

If its going to be taxed as partnership or disregarded entity then yes you may have problems. It will be treated as if the property was distributed out of the corporation to the shareholder(s) who then contributed to LLC. The distribution will be deemed sale of real estate at FMV. Did they treat it as sale at book value?

There's something in Florida that somebody mentioned somewhere that does something like this. I'll bet Florida isn't worried about the income tax consequences...

First, the corporation recognizes gain or loss (I believe loss is recognized on liquidating distributions as long as property is distributed pro-rata to the shareholders). - §336

Second, amounts received by a shareholder in a distribution in complete liquidation of a corporation are treated as received in full payment in exchange for the shareholder's stock. In other words, when a shareholder receives a liquidating distribution from a corporation, the shareholder is treated as if the shareholder sold its stock to the corporation in exchange for the money and/or other property received in the distribution (§331(a)).

So you would need to know shareholder's basis in the stock and compare to the fmv of property received (less any liabilities assumed along with the property) to see what kind of gain/loss there is at individual level.

Of course, it's mostly interesting because you have to figure out how a corporation can be taxed as a partnership.

LLC chose S corp status--husband/wife 2008. Haven't paid any wages either year. Don't want to deal with payroll tax issues--he is only employee. Does S corp status change taxing a conversion? Will filing 1065 for 2009 make the conversion effective 1/1/09?

Let's vote now; here's the proposal: "A corporation can convert to an LLC."

Vote either yes or no. If the motion passes, those who voted for it will be expected to explain the federal income tax consequences of such a conversion to the corporation and to its shareholders.

There are no tax consequences to the mere change; the consequences will result only from a change in tax classification. (If they're both taxed as corporations, it's a bit of a riddle whether it's nothing or an F reorganization, but nobody will care.) Those results are the same as those provided in reg. sec. 301.7701-3(g) for a change in box-checking status. If the corporation is taxed as a corporation and the LLC as a partnership, it's a liquidation of the corporation (which will be taxable) followed by contribution of the assets to a new partnership; if the corporation is taxed as a partnership and the LLC as a corporation, it's a corporate contribution, which may or may not qualify under sec. 351, followed by a distribution of shares to the partners.

I don't think you have the option to convert back to partnership. Under check the box, once you've elected corp treatment, I think your stuck with it for 5 years. I believe only way to be treated as partnership before 5 years is up is to dissolve original entity (and deal with ramifications of liquidating a corp) and form brand new LLC - new secretary of state filings, FEIN, etc.