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Sub-S to LLC conversion

I have a client who is the sole shareholder of a Sub-chapter S- corporation. He has a potential investor who wishes to acquire a 50S%+ share of the business from him. However, the potential investor is a non-resident alien. The investor, who is from a treaty country, intends to get an E-2 visa but does not plan to become a resident alien.

The alternatives I see, if this deal is to be done, is for the corporation to drop its S election and be taxed as a C-corporation, or for the entity to become an LLC. My main question is what are the tax implications of changing from a Subchapter S corporation to an LLC?

The corporation is a service business and owns no real estate or inventory. I have a pretty good understanding of the tax differences between a C-corporation and an LLC but any comments on that topic would also be welcome in case I haven't thought of something.

Cites of authoratative sources (code, regs, treasury pronouncements, court decisions) would be greatly appreciated.

Reply to
Bill Brown
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Without looking it up specifically, it seems to me that the conversion of a corporation to an LLC may qualify as a tax free reorganization if done properly.

Reorganizations are defined in section 368.

Reply to
Stuart Bronstein

Let's start with the S Corp. that can not have a nonresident alien as an owner. If the shareholder agreement does not disallow an act that would cause termination and state law does not disallow an act that would terminate S status, then a sale to a nonresident alien would cause a revocation of S status and you would have a C Corp. Otherwise, you would have to formally revoke the S status before the sale.

An LLC with multiple members is a partnership unless the LLC formally elects to be treated as a Corp. There are usually tax consequences of converting from a corporation to a partnership because of the liquidation of appreciated assets or stock. No appreciation, no tax. That said, you would again have to check with state law to see if you could "convert" your corpoation to an LLC. Not all states allow it. If not, you would first have to form an LLC and merge the corporation into it.

You and your potential investor need to decide what type of business entity (partnership or corporation) is the way you want to run the business.

Reply to
Alan

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