Discussion:Convert LLC partnership to C corporation
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Discussion Forum Index --> Tax Questions --> Convert LLC partnership to C corporation
| February 1, 2007 | |
| I have a new client that brought me a small problem. He has several companies (S-Corporations) that lease it's managers from an LLC that has been taxed as a partnership. The problem starts when I notice that he and the other partner (in the other companies as well as the LLC) are drawing salaries from the LLC. Since they are partners in the LLC (taxed as a partnership) they should not be drawing salaries but guaranteed payments to partners instead. The other small problem with this is that they also get their health insurance paid the aforementioned LLC.
Partnership 1065 returns have been filed for three years and now I am wondering what kind of pitfalls/problems I might run in to by converting the LLC (partnership) to an LLC (C-corporation). Based on my understanding, this would allow us to deduct the salaries to members as well as the fringe benefit of health insurance without any major issues. Will this create some type of conversion tax that I am unaware of? | |
| February 2, 2007 | |
| I think you're on the right track (surprising the crowd given my dislike of C corps!), this is a good use of a C. Inc'ing from a 1065 is tax free sec. 721 unless you're heavy on debt. You've got all the usual C corp problems to wrestle with, but if it's a thin corp, kind of just holding things to process salaries and fringes...and you don't leave any profit in there, good idea. Watch for PSC status... | |
| 2 February 2007 | |
| The other issue with this is that the original SS-4 stated they wanted to be taxed as 1120. However, the other tax preparer filled out form 1065 for each of the first two years of the entity. I am concerned about filing an 1120 this year as I feel that they won't accept it. My understanding is that they basically elected 1065 treatment by filing the 1065 forms. Can I just file the 1120 for 2006 or do I need to include the 8832 entity election form to change the status before filing the return? Will they accept the 8832 since it is within the 60 months? | |
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