LLC Conversion to C Corp - Spidell

LLC Conversion to C Corp

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Message Board LLC Conversion to C Corp

This topic contains 4 replies, has 3 voices, and was last updated by Luis Bravo 2 months, 1 week ago.

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  • #159698
    Olivia Jimenez
    Participant

    I have been informed by a CA LLC client that they filed a Certificate of Conversion with CA SOS dated 12/21/18 (status with SOS now shows as converted out) and is now a DE corporation formed 12/12/18. Client states name and EIN remain unchanged. Would a final CA 568 be filed for 2018 with activity thru 12/21/18? and an 1120 filed as initial return with activity from 12/12/18-eoy?

  • #160017
    Luis Bravo
    Participant

    There is a process on how to report the conversion. I actually did one for 2018. Yes…you will file a final form 568 from January 1 until 12/21/2018 and then an initial 1120 from date for incorporation to 12/31/2018.

    Is this a one member LLC or partnership LLC?

  • #160085
    Gerald Weiss
    Participant

    Luis,

    I am doing a 12-31-18 LLC 1065 to S 1120-S corp tax reclassification after 2 years of being LLC. I understand no final box is checked on 1065 as it would retire the EIN. A 2019 $800 100-ES using same EIN was submitted to get a FTB corp number. However, I had not thought about checking the 568 final box as the 1065 final box would not be checked.

    Do you have a reference stating the 568 final box should be checked even though the 1065 is not?

     

    Thanks

  • #160105
    Olivia Jimenez
    Participant

    Luis,

    I appreciate any guidance on the correct way to report this.

    This is a partnership LLC.

  • #160161
    Luis Bravo
    Participant

    You will need a new EIN for the corporation. My understanding is you cannot use the same EIN since it is two different entities for tax purposes. Therefore you will have to mark the LLC return as final.

    Here’s the process on how to report the conversion:

    Revenue Ruling 84-111 states the three ways to report a conversion from an LLC to a Corporation.

    1. Assets-up conversion
    2. Assets-over conversion
    3. interest over conversion

    In an assets-up conversion, the LLC liquidates all assets to the partners and immediately transfer them to the corporation in exchange of its stock.

    In an assets-over conversion, the LLC transfers the assets directly to the corporation in exchange of its stock. Then the LLC liquidates and distributes the stock to its partners who then become shareholders of the corporation.

    In an interest-up conversion, members transfer their partnership interest to the corporation in exchange for stock which officially terminates the LLC.

    All three transactions are supposed to be tax free transactions to the corporation under IRC Section 351

    In my case I reported the conversion as an “assets-over conversion” which seemed more logical and simpler than the other two. You will have to attach a statement under treasury regulation 1.351-3(a) to inform the IRS that this is a tax free transaction in exchange of stock. Depending on what assets are being transferred, you may have to do some valuation to determine the basis and FMV of assets. If liabilities are also being transferred, more research is needed.

    Here’s a link from NOLO press that gives an outline of each conversion. In this article is a link to Revenue Ruling 84-111: https://www.nolo.com/legal-encyclopedia/converting-llc-corporation-s-corporation.html

    Here’s a link to a pdf file that goes in detail on how the conversion is done. The explanation of each begins on page 37: http://media.straffordpub.com/products/taxation-of-cross-entity-mergers-and-conversions-2012-02-29/presentation.pdf

    Here’s a link to another pdf file that has visual diagrams of the conversions. The explanation begins on page 59: https://www.glaserweil.com/uploads/documents/Business_Entity_Conversions-Joe_Fletcher_-_7-18-13_presentation.pdf

    I also attached a supplement with the LLC K-1 explaining that the distribution is under Rev Rul 84-111