Many states allow one business entity type, like a Limited Liability Company (LLC), to convert to a corporation. This is called a formless conversion. It makes it easier for business owners wanting to switch because they don’t need to create a second entity and transfer all of the assets and operations. In other words, it’s administratively easier.
As with any transaction, there will be tax consequences to consider. These consequences will depend on how the LLC is currently taxed and the condition of its balance sheet. Let’s begin.
Single-member LLC (SMLLC) to Corporation
Because a SMLLC is disregarded for federal tax purposesa, the LLC member is deemed to contribute the LLC’s assets in exchange for its stock. §351 governs this transaction. If the liabilities of the SMLLC exceed the adjusted basis of the assets, gain will be recognized under §357(c) for the difference.
Two types of liabilities are excluded from this calculation, which areb –
- Liabilities the payment of which would give rise to a deduction
- Liabilities for payments to retiring partners as described in §736(a)
Multi-member LLC Taxed as a Partnership to Corporation
Rev. Rul. 2004-59 provides that when an LLC taxed as a partnership converts to a state law corporation, two events are deemed to happen –
- The partnership contributes all of its assets and liabilities to the corporation in exchange for stock
- The partnership then distributes the stock to the partners in a liquidating distribution
§357(c) would apply to this scenario and gain would be recognized to the extent that liabilities exceed the adjusted basis of the assets.
Under both scenarios above, the LLC would keep its EIN. If the SMLLC did not have an EIN it would need to obtain onec.