I have a general question about converting an LLC to Corporation as far as tax implications go. Is there a good article or publication that sort of lays out how the taxes will work come tax time next year? From what I can tell, if current liabilities exceed current assets, there may be some taxation because of that. Is there an easy way to estimate what kind of tax impact that will have?
USA Converting LLC to Corporation
- Thread starter Jareda17
- Start date
I'm going to assume that you're talking about federal taxes here. The IRS does not recognize LLCs, so I'm also going to assume that you mean Sole Proprietorship when you say LLC.
When you incorporate a business from a Sole Proprietorship to a Corporation, you are basically destroying your Sole Proprietorship and creating a new business. All assets and liabilities transferred to the new Corporation will count as a loan or capital injection to the new Corporation from the owner of the Sole Proprietorship. The owner of the Sole Proprietorship is still responsible to pay taxes on all income earned up until that point as if it were his own income.
Here's where it gets fuzzy for me; I don't think the Sole Proprietor's liabilities can be transferred to the new corporation. Your personal debts can't just be given away at your own discretion. Your personal assets can. What the (ex) Sole Proprietor could do is inject/loan his assets and then have the corporation reimburse him for his expenses.
When you incorporate a business from a Sole Proprietorship to a Corporation, you are basically destroying your Sole Proprietorship and creating a new business. All assets and liabilities transferred to the new Corporation will count as a loan or capital injection to the new Corporation from the owner of the Sole Proprietorship. The owner of the Sole Proprietorship is still responsible to pay taxes on all income earned up until that point as if it were his own income.
Here's where it gets fuzzy for me; I don't think the Sole Proprietor's liabilities can be transferred to the new corporation. Your personal debts can't just be given away at your own discretion. Your personal assets can. What the (ex) Sole Proprietor could do is inject/loan his assets and then have the corporation reimburse him for his expenses.
@Tyson Thank you for the reply:
I should have given more details. We are currently a partnership filed as an LLC. The company has outstanding liabilities owed. From an article I read, I saw the following
"Pursuant to IRC Section 357(c), an LLC may be potentially exposed to taxation during a conversion when aggregate liabilities assumed by the new corporation exceed the aggregate tax basis of the assets contributed. All assets and liabilities contributed to or assumed by the corporation are taken into account in determining total liabilities, tax basis and, ultimately, recognized gain. For example, upon conversion, an LLC which contributes $80,000 of assets (including cash, accounts receivable and fixed assets) and $100,000 of liabilities (including accounts payable, accrued expenses and notes payable) will recognize a gain of $20,000 (excess of liabilities over adjusted tax basis of the assets) and the gain will be reported on the partnership’s final tax return."
This lead me to believe that since our liabilities exceed our assets, that there would be some extra taxation. I do know taxes will have to be filed for the partnership until the date the corp was formed. Just trying to see if anyone had any input on conversions.
I should have given more details. We are currently a partnership filed as an LLC. The company has outstanding liabilities owed. From an article I read, I saw the following
"Pursuant to IRC Section 357(c), an LLC may be potentially exposed to taxation during a conversion when aggregate liabilities assumed by the new corporation exceed the aggregate tax basis of the assets contributed. All assets and liabilities contributed to or assumed by the corporation are taken into account in determining total liabilities, tax basis and, ultimately, recognized gain. For example, upon conversion, an LLC which contributes $80,000 of assets (including cash, accounts receivable and fixed assets) and $100,000 of liabilities (including accounts payable, accrued expenses and notes payable) will recognize a gain of $20,000 (excess of liabilities over adjusted tax basis of the assets) and the gain will be reported on the partnership’s final tax return."
This lead me to believe that since our liabilities exceed our assets, that there would be some extra taxation. I do know taxes will have to be filed for the partnership until the date the corp was formed. Just trying to see if anyone had any input on conversions.
That makes sense. Whether you do it all at once like the article states or over time like I was thinking, either way the corporation will be paying $20,000 to the partnership. The $20,000 will be going towards the partnership's business expenses and, as far as I know, will be tax deductible assuming those liabilities are valid tax deductions.
It would be best to talk to an accountant though of course
I went through this process with the company that I work for, but our assets exceeded our liabilities. The owner of the sole proprietorship had to pay additional taxes on the money that was "injected" to the corporation, even though it was the business's money and not really his.
It would be best to talk to an accountant though of course
I went through this process with the company that I work for, but our assets exceeded our liabilities. The owner of the sole proprietorship had to pay additional taxes on the money that was "injected" to the corporation, even though it was the business's money and not really his.