LLCs In The Real World. Larry L Gray, CPA

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1 LLCs In The Real World Larry L Gray, CPA

2 What is a LLC? 2 Legal entity LLC is a term of state law, not of federal law Combine Individual, Partnership and Corporate rules Organized separate and apart from owners

3 What is a LLC, Cont. 3 Offers limited liability similar to Corporate veil Not a tax entity Options for tax treatment Flexible vehicle for business Contractual Statutory Management style

4 Birth 4 LLC Articles of Organization Operating Agreement Other state-required forms

5 Birth, Cont. 5 Not a Tax Entity Titling of Assets Operations Separate entity

6 Entity Classification 6 Sole Proprietor Disregarded Partnership Default S Corp Form 2553 C Corp Form 8832

7 Forming Entity 7 Partnership Assets transfer to partnership No recognition of gain Unless liabilities > basis of property transferred Corporations (S and C) No recognized gain or loss if stockholder has control upon transfer Unless: liabilities > basis of assets transferred Only allowed to receive stock as consideration

8 Taxation 8 Partnership, LLC Allocate income/deductions by agreement Substantial economic effect S Corp, LLC No allocation of income/deductions allowed Income/deductions prorate per share C Corp, LLC Preferred stock for dividend preferences Losses deductible at corporate level

9 Taxation, Cont. 9 Basis Adjustments Passive Activity Loss Limitations Built-in Gains Tax Passive Investment Income At-Risk

10 Compensation and Payroll Tax 10 Partnership Guarantee payment - SE tax S Corporation Reasonable compensation Payroll taxes on salaries C Corporation Reasonable compensation Payroll taxes on salaries

11 Distribution - General Rule 11 Partnership, LLC Distribution not taxable Basis in asset distribution equal to partnership basis S Corp, LLC Distribution at FMV Any gain at Corp level Basis of distribution: FMV C Corp, LLC Distribution = Dividend = Double taxation Basis of distribution: FMV

12 Liquidation or Dissolution 12 Partnership Dissolution Choice of partners, or 50% or > change in owners in 12 months Proportionately distributed assets = no tax to partners Disproportionate distribution = deemed sale = recognized gain S Corporation Single taxation Built-in gain if dissolution within 10 years of S election C Corporation Double taxation

13 Why Should I Be 13 Sole Proprietor, LLC? Easy start-up Full control Lower cost Less required record keeping

14 Why Should I Be 14 Partnership, LLC? Flexibility Distributions Pass through taxation Minimal formalities 754 Election

15 Why Should I Be 15 S Corp, LLC? Reasonable compensation Gain treated as profit, not wages No SE on profits 2553 election

16 Why Should I Be 16 C Corp, LLC? No limit to number of owners Premier entity for going public Attractive for investors Retention of profits 8832 election

17 Entity Choice Consideration 17 Who is your taxpayer? Future sale? Estate and gift planning? Asset protection?

18 Multiple LLCs in a Business 18 Separate liability Deflects business operations Changes in future Sale Retirement

19 Changing to Another Type of Entity 19 Partnership to Partnership, LLC No tax effect to transfer assets Unless liabilities assumed are > basis of transferred assets Partnership to S Corp, LLC No tax effect to transfer assets Unless liabilities assumed are > basis of transferred assets Partnership to C Corp, LLC No tax effect to transfer assets Unless liabilities assumed are > basis of transferred assets

20 Changing to Another Type of Entity, Cont. 20 S Corp to: S Corp, LLC or C Corp, LLC election No gain/loss recognized S Corp to: Partnership, LLC or Sole Proprietor, LLC conversion Gain or loss recognized

21 Changing to Another Type of Entity, Cont. 21 C Corp to: Partnership, LLC or Sole Proprietor, LLC Gain/loss recognized S Corp, LLC election No gain/loss recognized Unless LIFO used

22 Summary 22

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