I recently inherited an "S" Corp which has one asset - a multi-family apt bldg. Would it make sense to open an LLC to transfer the asset into, and then dissolve the corporation? Is that even possible? Or would the tax ramifications be huge?
2 Answers from Attorneys
California LLCs grossing more than $250,000 a year are subject to a tax or fee on their in-state gross revenues. This makes LLCs a little more tax-heavy than S corporations when their business has big cash flows. On the other hand, LLCs are generally regarded as being very flexible as to organization and management matters. I would not recommend going through the hassle and expense of converting ownership from the S corp. to an LLC unless and until you had competent tax and legal advice ...... both of which, as a new owner, you'll need and I urge you to get! More likely than not, you'll be better off keeping the building in the existing S corporation, but only your CPA can tell for sure.
Big tax problems. This is treated as a dissolution of the S Corp,and a deemed transfer to you as shareholder then from you to the to the LLC. The deemed distribution of the property from the S Corp to you would be a taxable transaction, and taxed on the difference between the present fair market value of the property and its inside tax basis would result. This is taxed, in effect , just like a sale at fair market value (except for the small difference that you have no cash to pay the tax). The tax would be payable by you as the shareholder. This would increase your basis. Assuming you are the only shareholder , you may be able to avoid property tax reassessment if done carefully.
There are methods to use to plan around these results, but they are difficult and depend on what you want to accomplish. Do you plan on selling? Are you keeping the property? All these are major factors in what you can do.
Seek good tax counsel with knowledge of S Corporation tax planning.
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