Conversions, Restructuring & Growth Events
This report analyzes the complex tax consequences associated with the lifecycle of a Limited Liability Company (LLC). As LLCs evolve from single-member disregarded entities to multi-member partnerships, or convert to corporations for growth, specific tax events are triggered.
Key focus areas include the "deemed" nature of assets moving in and out of solution during restructuring (Rev. Rul. 99-5, 99-6) and the critical basis adjustments (Section 743/754) required to prevent double taxation during membership changes.
Adding members converts a DRE to a Partnership. Capital vs. Profits interest distinctions matter.
Moving to S-Corp or C-Corp status triggers deemed exchanges of assets for stock.
Frequency of Tax Issues in LLC Growth Stages
When a Single-Member LLC (Disregarded Entity) adds a new member, it becomes a Partnership for tax purposes. Revenue Ruling 99-5 outlines two distinct situations with vastly different tax consequences based on how the new member joins.
Select a situation above to see the tax breakdown.
Compare tax efficiency: LLC (Pass-through) vs. C-Corporation.
An LLC can elect to be taxed as a Corporation. This is a "deemed" transfer of all LLC assets/liabilities to a new Corporation in exchange for stock, followed by a liquidation of the LLC.
Generally tax-free under §351. However, trap for the unwary: if LLC liabilities exceed the basis of transferred assets (Section 357(c)), the excess is taxable gain.
A critical concept in LLC taxation is the disparity between a member's basis in their interest ("Outside Basis") and the LLC's basis in its assets ("Inside Basis"). Without a Section 754 election, a new member might pay taxes on gains that accrued before they joined.
Asset: Real Estate purchased for $100k.
Current Value: $1,000,000.
Event: Member A sells 50% interest to Buyer for $500k.
Problem: The LLC's tax basis in the land is still $100k. If sold tomorrow, LLC realizes $900k gain. Buyer is allocated 50% ($450k) of gain, even though they just paid fair market value!
Toggle the buttons to see the impact of the Section 754 election.