Discussion:LLC owned by a corporation and 3 individuals?
From TaxAlmanac
Discussion Forum Index --> Basic Tax Questions --> LLC owned by a corporation and 3 individuals?
Discussion Forum Index --> Tax Questions --> LLC owned by a corporation and 3 individuals?
Big4dropout (talk|edits) said: | 17 August 2010 |
| I have a client who has several lots of land that he is selling to developers/builders. The land is currently owned by a c-corp. He wants to form an LLC with the c-corp as the parent entity and transfer the land to the LLC for sale. I don't see a problem with this if the LLC is single-member/disregarded. However, now he also wants to give each of his 3 adult children an interest in the LLC.
The client and his wife own the corporation. I'm not really sure how to tackle any tax consequences that might result from transferring the land to the LLC and transferring partnership interests to each of the 3 children. Any ideas on the best way to do this, and any roadblocks I might need to look out for? | |
| 20 August 2010 | |
| A corporation can't "gift" assets to individuals. The first thing to consider is how to treat the LLC.
If an LLC is treated as a corporation and an election is made to treat it as a partnership, the corporation is treated as liquidating and distributing its assets to its shareholders, who in turn contribute those assets to a partnership. | |
| August 20, 2010 | |
| Why would anyone elect to have the LLC treated as a corporation?
You can either have the corporation distribute partnership interests, which means realizing gain on those interests and then dividend income, or you can have the kids contribute cash (or something else) to the partnership for interests of equal fair market value (not more). (Or, have the parents do the contributing and then give interests to the children.) | |
| 20 August 2010 | |
| Well,the way I read it, corp wanted to set up LLCs. If they were disregarded entities, then they also would be treated as a corporation (or some such folderol). The whole thing seems like wishful thinking to me. Land owned by a C Corp {shudder}. Probably done a couple of decades ago and they missed the opportunity to switch to an S Corp in 1986. At least I hope that there is a reasonable explanation. | |
| August 20, 2010 | |
| There's just one LLC. It can be disregarded, or it can be a corporation, not both. It should be disregarded; when additional owners come in, it becomes a partnership. | |
| 20 August 2010 | |
| Right, and the point I was trying to make albeit clumsily, is that it is a taxable event - treated as a liquidation and distribution of assets to the shareholders unless new members contribute assets equal to the FMV of the LLC. | |
| 21 August 2010 | |
| If the corporation owns the land, why not have Mom and Dad gift stock in the C corporation to the children each year up to the gift tax-free maximum? | |
| 22 August 2010 | |
| That requires some fairly extensive planning, and I have doubts that someone who has a C Corp that owns land is going to have the ability to carry that out. | |
| 23 August 2010 | |
| Well, somebody someday is going to have to pay the piper. I'm not sure what is so complicated about gifting stock in a C corp. It wouldn't solve the problem of having appreciated real estate in a C corp, but it would postpone it, since no gain or loss would be recognized to the parents on the gifts of stock. The alternative the OP suggests would trigger the corporate level tax on the appreciation as the LLC interests are given to the children -- in effect paying the piper up front. That may be a better option in the long run, since the children would have no entity-level tax to pay on any subsequent appreciation in the property. | |
| August 23, 2010 | |
| If there's nothing else in the corporation, an S election and waiting until the expiration of the BIG period eliminates the double tax (but not the other evils of the corporate form). If there is something else in the corporation, and there's some reason it should be done through a C corporation, and it could use cash, then a partnership, with the kids getting their interests for cash contributions, and -- if you're expecting lots of appreciation -- the corporation getting a preferred interest moves out that appreciation. Only wizards actually know future returns, but lots of taxpayers think they are wizards. | |
| 23 August 2010 | |
| I agree with both of you. My comment was based on the fact that the OP did not appear to be particularly sophisticated in this area, and I had my doubts about whether he could be a driver in this situation. I tend to look at the ability of people to adequately plan for the long term (not just for income taxes but also for estate planning), and then to follow through, and I didn't see that here. | |
