Discussion:Issues w/ LLC changing to S corp taxation
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Discussion Forum Index --> Tax Questions --> Issues w/ LLC changing to S corp taxation
| 27 March 2006 | |
| Wow - just did my first LLC that changed tax status to an S corp effective 1/1/05. It was a land development company originally an LLC. Started getting profitable selling lots. Ordinary income. Assume subject to SE tax. So they converted to "S" corp status ("check the box" change - didn't actually set up a corp). Several issues popped up. 1) never thought about it, but what if debts exceeded basis of assets - subject to taxation? I think so, but luckily that wasn't the case. 2) How do you track owner's basis now? I went to start up their "S" stock basis thinking I would just start with their basis (capital balance) as an LC. But it's negative!! Of course they were deducting losses using the debt inside the biz as basis. Can't do that now that it's an s corp. Start with negative stock basis?? That didn't look good. Start with 0 basis and try to keep track of the negative capital balance for future use when sold, etc.?? Or do we have a taxable gain at the shareholder level? - maybe debt did exceed basis??
Anyway, wondered if anyone else has run into this. If not, think about it all before jumping right into what seems like a simple "check the box" change of taxation status. | |
| 27 March 2006 | |
| Another case for 'if you really want to incorporate, then go incorporate'.
Thanks Scott, I should save this. Checking the box to make an S is just crazy in my opinion. | |
| 27 March 2006 | |
| I was glad to see your post. Just Fri I sent in the paperwork to file for a corporation that was an LLC. With all the paperwork, new tax numbers, unemployments, S status, etc, I was wondering if I did the right thing. It sounded so much easier to just check the box. Now I'm glad I didn't.
Is there anything else that needs to be done that I might not be thinking of? I was also planning on just transferring the balances at book value. Is that right? They do have a positive capital balance but also a lot of debt. All the debt is in the business name so that shouldn't affect basis right? | |
| 16 December 2008 | |
| I have a client who wants to continue as an LLC but be taxed as an S-Corp beginning in 2009. I noticed people talking about a box that needs to be checked, but I cannot find it. Is it on the 2553? on the 1120S? or the K-1? And what exactly does it say?
Thanks Sally | |
| December 16, 2008 | |
| That box is actually on the 8332, but to elect S status, you just file the 2553 by itself. Why make the change? | |
| 17 December 2008 | |
| Client wants the tax advantages of S status. LLC taxed as an S Corp. seems like the easiest way to go - client doesn't have to pay the State of Co $50.00 to change from LLC to Corp., she can keep her current EIN and won't need Articles of Organization, we also won't have to worry about transferring assets. We're also considering dissolving the LLC and creating a new S corp. I guess all we would have to do is make the change with the state, create bylaws, fill out the 2553, and apply for a new EIN. As far as the assets go, she could sell them to the corp. at her current basis and continue depreciating them at their adjusted basis. Am I looking at the this the right way?
If we do proceed with LLC taxed as an S, I think we would have to check the Rev. Proc. 2004-48 box on the 2553. Thanks | |
| December 17, 2008 | |
| You don't sell the LLC assets. Sec. 351 is the tax free organization of a new corp, you merely transfer the balance sheet and adjust the equity. But the question remains, why? What does the client perceive the tax advantages to be? While I like S corps most, with proper splitting of the membership interests in the LLC, much the same can be accomplished with what she has now. | |
| 17 December 2008 | |
| She likes the idea of paying herself a reasonable salary and not paying SE tax on net profit. If I'm not mistaken, a single member LLC taxed as an S corp. does not have to pay SE tax. The owner would be paid a salary and anything above that would be taxed once as ordinary income. If she were to remain an LLC she would pay more in taxes.
"While I like S corps." - Why would you not change? Thanks for your help JR1! | |
| December 17, 2008 | |
| Ah, yes, now I'm with you. Single member. Yes, change! How is up to you and state law options. Checking the box is cheap and easy (really not checking the box, but filing 2553) as long as you don't see any LLC/Corp conflicts arising. We've talked about some where the law for one conflicts with the law for the other...that's the only reason to just incorporate, makes it 100% certain in every way. | |
| 17 December 2008 | |
| Sec. 351 states that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons.
My question is, if we dissolve the LLC and incorporate, will we be able to just transfer the assets? or will the S-corp be required to purchase the assets from the LLC at their adjusted basis? | |
| December 17, 2008 | |
| Same thing applies when you roll from a 1065 to a corp. No worries. No sale...you're just incorporating is all. You transfer the Balance sheet AS IS with the exception of making the equity section show Capital Stock and Add'l Paid in Capital to match net equity of the sole prop. Make sure there's positive equity, or leave out some debt. | |
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