Planning considerations when converting a C corporation to an LLC

The owners of a C corporation might consider a conversion to a passthrough entity as a means to retain the limited liability and transferability of ownership that the corporate entity provides, while avoiding the double taxation of corporate earnings. As a profitable corporation matures, it becomes...

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Bibliographic Details
Published in:The Tax Adviser 2011-02, Vol.42 (2), p.110
Main Authors: Everett, John O, Raabe, William A, Hennig, Cherie J
Format: Magazinearticle
Language:English
Subjects:
C corporations
Conversion
Corporate income taxes
Corporate taxes
Cost control
Cost recovery
Depreciable assets
Double taxation
Fair market value
Laws, regulations and rules
Liability
Limited liability companies
Payroll taxes
Present value
Profits
Self employment
Stockholders
Tax rates
Tax regulations
Taxation
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Summary:The owners of a C corporation might consider a conversion to a passthrough entity as a means to retain the limited liability and transferability of ownership that the corporate entity provides, while avoiding the double taxation of corporate earnings. As a profitable corporation matures, it becomes more difficult to "zero out" corporate taxable income through shifting devices such as salaries, fringe benefits, and interest payments. In the conversion of a C corporation to a limited liability company (LLC), the transaction is treated as a liquidation of the corporation under Sees. 336 and 331, followed by a liquidating distribution of the net proceeds to the shareholders. The assets are then contributed to the new LLC. An actual liquidation may not be required, as many states facilitate such a conversion by allowing companies to simply file a few forms and pay a processing fee. After the conversion, the new LLC takes its assets with a fair market value basis. Other corporate tax attributes are eliminated. Operating results going forward, as well as the eventual liquidation of the LLC, are now single-taxation events.
ISSN:0039-9957