Pitfalls of Converting an Existing Business Into an LLC
Learn about common pitfalls of converting an existing business into a limited liability company (LLC). Avoiding these problems will ensure a smooth transition for your company.
Pitfalls
There are two common situations where unintentional errors may occur:
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When an existing business, such as a corporation, is converted into an LLC there may be tax implications, such as:
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The conversion may result in a taxable gain;
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Employment tax wage bases may be affected.
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Special rules may apply when the LLC has an operating loss:
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The amount of loss a member can deduct may be limited because of the member’s limited liability for LLC debts. (IRC Sec 465)
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Passive Activity Loss limitation may restrict the amount of loss a member can deduct. (IRC Sec 469)
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This chapter does not deal with the complicated issues related to business entity conversions and practitioners are advised to carefully review the laws and procedures relating to entity conversions.