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15 - Limited Liability Companies 1

Page 287-310

I. Introduction

There is a lot of uncertainty of what exactly an LLC is. Tax professionals think

about tax issues. Lawyers consider legal

issues.But this is agreed:

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An LLC is not a corporation; it is a legal form of a company that provides limited liability to its owners. All of the rest is up to the state enabling charter.

LLC

Business Start Up

Hire Employees

Expand to

Multiple Locations

Liquidate Business

I. Introduction

The natural progression of a business?


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I. Introduction

Owners can participate in management

While limiting their liability

Eligible to make a tax entity election

In many states the procedures of maintenance of a LLC are much simpler


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For tax professionals we recognize the fact that:

I. Introduction

IRS recognizing increasing confusion regarding the employment status of LLC members. So for the SMLLC member that is taxed as a sole proprietorship the member is self-employed.


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I. Introduction

The operating agreement

While not required it certainly is a best practice issue in: Any LLC with multiple members A SMLLC that takes on additional membersNOTE: Most banking will require one.


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III. Key Tax Advantages andDisadvantages

C. What do I want to be for tax purposes?

TAX ELECTION

C Corporation

S Corporation


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Lots of twists and turns but taxpayer gets favorable IRS opinion in PLR 201636003


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D. Consider the state issues?1. State tax classification

does not mirror federal.2. Registration differences

at state level3. How are licensed

professions dealt with, what is permitted and not allowed?


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IV. Single Member Limited Liability Company

B. An LLC can provide excellent liability protection for the beneficial owner of the property, but some considerations:

1. Multiple LLCs for multiple rental properties to isolate them from each other.

2. High risk enterprises can isolate assets even in S-Corps without creating issues such as QSUB elections.


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V. Conversion of a Sole Proprietorshipto an LLC

B. Adding a member to a SMLLC

If a non-electing (entity) LLC, then the addition of the member will be treated as a contribution of an interest to a partnership under IRC § 721 – See Partnerships

If the entity has made an entity election then the rules of IRC § 351 will apply, including the 80% control rule. – See C Corporations or S Corporations


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VI. SMLLC to Multimember LLC (Or the Reverse)

A. An SMLLC that adds a member will be subject to the rules of IRC 721 – Contributions of property to a partnership – See Chapter 17

B. A multimember LLC that becomes a SMLLC by the removal of one or more members – Will likely be a technical termination – See Chapter 21


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VI. SMLLC to Multimember LLC (Or the Reverse)


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VII. LLC(s) and Allocating Non Recourse Debts

The nature and character of non-recourse debt for an LLC:1. Debt that NO member has any personal

liability.2. There is an economic risk of loss to a member

either directly or indirectly.3. Exculpatory Debt – The is no member

personal liability and is not secured by an LLC asset.


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VII. LLC(s) and Allocating Non Recourse Debts

B. If a member is at risk for LLC non recourse debt the debt is allocated 100% to that member. (#2)

C. Losses that are derived from either true nonrecourse debt or exculpatory debt is allocated based on member interest. (#1 & #3)

D. The majority of LLC debts are exculpatory as there is no recourse by the creditor of the member. (#3)


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VIII. Allocating Liabilities to SMLLC Partners Under IRC Sec. 752A. Do determine At-Risk debts that are not at

risk will not be considered, so what debts are considered at risk, because:

Line 32 of Schedule C asks:


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VIII. Allocating Liabilities to SMLLC Partners Under IRC Sec. 752B. The IRS position: As the member is only obligated to repay

exculpatory debts to the extent of LLCs net assets

Then the member will only be treated as at risk to the extent of those assets.

C. So net assets at risk is?


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X. Check the Box Election

A. What do I want the taxation to be?

That decision NEVER affects the status of liability protection under state law.


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X. Check the Box Election

The process looks like this:B. An LLC is: A disregarded entity if one member, it is what it’s

owner is and for income tax purposes it does not exist.

If two members or more it is a partnership, for income tax purposes, unless it makes a “classification election”, the choices are

1. File Form 8832 – Will be taxed as an association, i.e. Form 1120 of a variety other than an S Corporation


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XI. LLC Electing to be Taxed as an S Corporation

How to make an election to be taxed as a S Corporation – File Form 2553

This applies at time of organization if done within 2 months and 15 days of the beginning of operations, tax year, or capitalization or at time of filing or later for all other filings.

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XI. LLC Electing to be Taxedas an S Corporation

B. An LLC making an S election is deemed to have transferred assets in and IRC 351(a) transaction.

E. If the LLC is currently being taxed as a corporation the “normal” S election rules apply.

Choose wisely the pathway back is not so easy, i.e. liquidation will be corporate rather than partnership like.


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XI. LLC Electing to Be Taxed as an S Corporation

A thought regarding election process

IRC § 1362 – Statutory authority for the actual election.

Reg. § 301.7701 – Controls the processes of the election and the revocation of elections. Allows a streamlined process when making S-

election (Assumes both association and S status by filing Form 2553).

The termination or revocation of an LLC that has made an S-election moves back to default.


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XII. Late Classification ElectionsIntending to be C Corporation

Rev. Proc. 2009-41Requirements: Form 8832 was not filed. No return has been filed or all returns have been

filed consistent with election. The corrective procedures are undertaken within

3 years and 75 days of the effective date. There is reasonable cause (attach explanation). Form 8832 is filed with “FILED PURSUANT

TO Rev. Proc. 2009-41” across the top


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XII. Late Classification ElectionsIntending to be C Corporation

Rev. Proc. 2009-41Requirements:Form 8832 was not filed.

FILED PURSUANT TO Rev. Proc. 2009-41


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XIII. Late Classification ElectionsIntending to be S Corporation

Rev. Proc. 2013-30 – (Chapter 10 for more details) An eligible entity, and Intended to be S-Corp on effective date but oops, and Failed to file Form 8832 or/and 2553, and Fails to qualify solely because Form 2553 was not

filed and The entity either: Filed in all years consistent with S Corp status No returns have yet to be filed

Request is filed within 3 years and 75 days from effective date.


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XIII. Late Classification ElectionsIntending to be S Corporation

There is NO requirement under the Rev. Proc. 2013-30 to file Form 8832. IRS will either destroy it or return the request to “correct”. Problem 301.7701 and Rev. Proc. 2013-30 are out of sync:


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XIV. New Regs-LLC EmployeePayroll Tax Issues

IRS has issued Reg. § 301-7701-23 in response to a large number of LLC members that have in the past filed as employees.

While a SMLLC/LLC is disregarded for income tax purposes it is not for payroll and excise tax purposes BUT a member of an LLC

Shall report any earnings based on the income tax filing of the SMLLC/LLC

TP

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XIV. New Regs-LLC EmployeePayroll Tax Issues

E. Caution: IRS clarified in earlier guidance with Reg. § 31.3121 and Reg. § 31.3304 that a spouse or child under age 18 as of 10/31/2011 in the employ of a spouse via a LLC would be treated as employees for income tax purposes: Spouses as employees are eligible for IRC

105 and IRC 106 benefits Are not subject to FUTA Children under age 18 were exempt from

FICA and Medicare

TP

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XV. New Regs – Partners in Partnerships Owning Disregarded Entities

IRS in issuing Temp. Reg. § 301.7701-2T clarified the issue as follows:

If the member is treated as a partner for purposes of income tax they are NOT employees and will be subject to self employment tax on their service earnings and fringe benefits.

This does not remove the prior guidance that allowed partnerships to treat de minimis partners (less than 2%) as employees

TP

2


Renkemeyer Case: The limited partnership of the law firm did not provide the exclusion of SE under IRC 1402(a)(13) to the law firm partners – “Nature of limited liability partnerships were different than limited partnerships”

XVI. LLC Member Self Employment Tax


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Castigliola Case: Let’s try to get rid of SE on distributive share amounts – TC Memo 2017-62 – The IRS said: All members participated

equally in management Were equal in their relationship

with the PLLC All income subject to SE tax

said court



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2. The IRS continues to attempt to identify and assess service partnerships that attempt to deflect taxation of services income for SE purposes, FYI no wins for taxpayer:



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a. CCA 201436049 – Investment Management Company paid themselves via payroll/W-2 in an attempt to bifurcate earnings – NOPE – See additional discussion bottom of Page 305

The IRS continues to attempt to identify and assess service partnerships that attempt to deflect taxation of services income for SE purposes, FYI no wins for taxpayer:



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b. Reg. § 301.7701-2T IRS clearly states its position for sole proprietorships, LLCs taxed as partnerships, and other various partnerships

3. CCA 201640014 – Restaurant made argument that franchise restaurant should be bifurcated



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a. Taxpayer Arguments1. Capital of others work2. Compensation based on actual

servicesb. Member was not limited and was

in fact a service partner, due to his highly participatory management of the enterprise

More details top of Page 306

So the IRS position will be:Service businesses or business where capital are not “significantly” material – 100% of income will be subject to SE



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So the IRS position will be:Business where capital is an income producing factor:Passive Partner – Not subject to SEMaterial Partner – Lay groundwork to clearly bifurcate the differences between capital returns and “reasonable” payments for services rendered



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XVII. Proposed Regs. Would ImposeInformation Reporting

Impose 1099 reporting requirements on SMLLCs, that are owned by foreign entity.


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XVIII. Series LLCs – A Brief DiscussionThe problems for us:

Each LLC in the series will require its own FEIN

Some states do not recognize Series LLCs and require individual registration.

Unless EVERY LLC in the series has identical membership separate tax returns are required.


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limited liability companies - oataxpro.com · 15 - limited liability companies page 287 an llc is...

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