Limited Liability Companies
Alan L. Weldy
Limited Liability Companies (“LLC’s”) are an increasingly popular choice of business entity. LLC’s offer limited liability as well as managerial, ownership and tax flexibility. This increase in popularity has led some corporations to attempt the transition to an LLC structure. It is important to understand that under the provisions of the corporate and LLC statutes, as well as the Internal Revenue Code, such transitions may involve complexity and adverse tax implications.
While the statutes in most states regarding LLC’s allow for the merger of a corporation into the LLC, many of those statutes do not treat these transactions as tax-free reorganizations. To the contrary, many states treat such a transaction as a liquidation of the corporation, followed by a transfer of the corporation’s assets to the LLC. If the corporation has appreciated assets, this transaction may result in taxable income to the corporation and/or its shareholders.
The issues outlined above are further complicated depending upon whether the corporation is a “C Corporation” or a “Subchapter S Corporation.” The change from a Subchapter S Corporation to an LLC may be deemed merely a change in form, so long as the LLC continues to meet the Subchapter S eligibility requirements.
The bottom line is that deciding on a choice of entity when beginning a business requires thought and consideration. Choosing the wrong form of entity may not be easily corrected without adverse tax consequences. You should always consult with your legal and/or accounting advisor regarding the proper choice of entity based upon your particular circumstances and needs.
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Alan Weldy is an attorney of Counsel with the law firm
of Yoder, Ainlay, Ulmer & Buckingham, LLP in Goshen, Indiana, practicing
in the areas of business litigation, corporate law, and health law.
While information in this article is
believed to be accurate, it is educational and general in nature, and
should not be construed as legal advice. Please consult your attorney
for specific legal advice. Yoder, Ainlay, Ulmer & Buckingham, LLP
© 2006
Yoder,
Ainlay, Ulmer & Buckingham, LLP