Limited liability companies are generally better asset protection entities than corporation. A judgment debtor can levy upon the debtor’s stock in a corporation and in the case of a small corporation possibly stop the corporation business and liquidate corporate assets. In the case of a debtor’s limited liability company interest the judgment creditor’s remedy is limited to a lien on distributions, if any, and the creditor cannot stop the LLC operations or force the sale of the LLC’s assets. In the past, the corporation, and particularly Sub-S corporations, were the most common business entity for closely held small business. When owners of small corporations become concerned about asset protection they often want to convert their S corporations to LLCs, possibly LLCs taxed as S corporations for tax purposes.

This past week one such corporation owner discussed with me the procedures to convert his profitable corporation to a limited liability company. Florida statutes provide a means to convert a domestic or out-of-state corporation to a Florida LLC. The issue we discussed was whether the conversion of a corporation would be treated for tax purposes as a liquidation and would accelerate the owner’s income tax liability.

To be sure, I forwarded the tax question to a local account named Lonnie Young. Lonnie has years of experience accounting for small business clients. He responded by email as follows:” 

A conversion from S to an LLC can qualify as a tax-free reorganization under § 368-(a)(1)(F). In a Letter Ruling the basis and holding periods of the assets in new LLC are the same as in the prior Sub S. The S Corp status did not terminate as a result of the reorg since new LLC retained its S corp election and continued to meet S corp requirements per § 1361 (Ltr Rule 200528021).There will be issues if the ownership as a result of this re-org changes. Same owners, same percentages should not be a problem.” 

So, if a S Corporation owner wants to reorganize as an LLC taxed as an S corporation (by filing Form 8832) he should be able to do so without adverse tax effect as long as ownership does not change. I would be interested to know if the answer is the same if one spouse converts his S corporation to an LLC owned by the two spouses jointly when the spouses file joint tax returns- is this merger a change of ownership for tax purposes?

Jon Alper

About the Author

Jon Alper is a nationally recognized attorney specializing in asset protection planning. He has over 35 years of experience and graduated with honors from the University of Florida Law School.

Jon has been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal. He has helped thousands of clients protect their assets from creditors.

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