HI ALL, THIS IS THE FINAL AND THIRD STAGE OF THE LLC, IF THESE DECISIONS ARE NOT MADE. YOU WILL HAVE PROBLEMS.
PART III LLC'S THE UGLY
1. Improper formation of the LLC- Failure to meet taxpayers needs
A. When the LLC is not the proper formation:
1. Business operates crossing muttiple state jurisdictions
2. Costs are Prohibitive---Insurance vs LLC
3, Membership interests in an LLC may not be publicly traded
NOTE:
(The LLc may be taxed as a corporation if the interests are publicly traded unless at least 90 percent of its income is specified passive income and centain other requirements are meet)
4, Automatic dissolution- The LLC may dissolve upon the loss of a member unless a majority or all of the remaining members agree to continue the business as a LLC.. This makes LLCs unattractivefor large organization, thos with many investors. The operating agreement for the LLC should address business continuance upon loss of a member.
B. SINGLE MEMBER LLC UNDER ATTACK
1. These are actual cases that were heard before both the IRS and State department of Revenues
Aibright, a Colorado case where a debtor in bankruptcy was the sole owner of a Colorado LLC. A argued that under Colorado’s LLC statute the property in the LLC should be protected from sale by the trustee and, at most, the trustee should be able to obtain a charging order.
The court disagreed and allowed the trustee to sell the property in the LLC. The decision was based upon the fact that there were no “other:members in the LLC. The Colorado statute is written to protect “other” members and requires unanimous approval of the “other members” when a transfer of ownership is imminent. The statute protects all interested parties and prevents them from having to work with a party of when they do not approve, i.e., a creditor. Because A LLC was a single- member, there were no “other members” to protect and ownership could be transferred to the bankruptcy trustee.
Now the 6 Circuit of Appeals has again attacked sing-member LLC ownership, this time the court discussed taxation of the entity.
In Liltriello v. United Slates, et al. the court held that owners of single- member LLCs must “check the box” in order to be treated as a corporation for tax purposes.
If the owner of a single-member entity does not “check the box” they will be taxed at the default status which is that of a sole proprietorship. And, along with that comes sole proprietorship liability.
Littriello was the owner of several single-member LLCs and the court held that he had not elected to have the entities treated as Corporations so the entities were treated as sole proprietorships and he was responsible for the LLC’s liabilities.
He did not “check the box” because he wanted to avoid the double-tax consequences of corporate status. Doing so does avoid double taxation because it keeps the owner at the default status of sole proprietorship where the owner is taxed one time in his tax bracket. Because he defaulted to ownership as a sole proprietor to avoid the double taxation of the Corporation he also missed out on the protections that come along with a properly setup entity from an asset protection standpoint. The case tells us of the importance of education and proper planning.
C. Failure to make an election.
1. The taxpayer or their advisor fails to file Form 8832 or Form
5523, electing to be taxed as a Corporation or as an S
Corporation.
2.The taxpayer has paid salary in way of a W-2 to himself as if
the LLC was a Corporation, C or S.
3.The March 15 filing due date has passed for the “late
election” under Rev. Proc. 2002-59.
NOTE:The current Rev. Proc. only allows a late election until the original due date of the return with no extensions. A Private Letter Ruling may be the only avenue for your taxpayer.
4. Resulting amendment to Forms 941, 940, W-2’s and State
Wage and Unemployment Reporting may be required as the
default provision of Sole Proprietor or Partnership will be
required without the initial or valid late election.
NOTE: Failure to file the ‘S’ election, Form 2553, may be equally problematic.
D. Mergers and Conversions gone bad.
1. Existing C or S Corporation wishes to merge or convert into
the LLC taxed as a C or S Corporation.
2. The LLC must be formed with a new EIN.
3. The LLC must “elect” to be taxed as either a Corporation or
an S Corporation, the minor image of the to be merged or
converted C or S Corporation.
4. Merger or conversion documents must be written to effect
the merger or conversion.
5. The resulting LLC will be the entity yet retains the old
entities
EXAMPLE: JOHN is the sole shareholder in WIDGETS, INC. He has not acted as a Corporation, has had no meetings with the shareholder or members of the Board of Directors. There are no Corporate Minutes. He signs all documents as an individual.
The Corporate Federal Tax Classification is advantageous to John but all of the legalese is not and you frar that the “corporate veil” would be pierced for failure to act as a Corporation.
You form the LLC, Widgets Inc. Your attorney writes the merger or conversion documents to merge the INC into the LLC. However, your attorney fails to make the Form 8832 “election” to have the LLC taxed as a Corporation. Therefore the merger is of a Corporation into a Sole Proprietorship — a complete “liquidation” of the Corporation.
One question remains, does your attorney have Errors and Omissions insurance?
6.“F” reorganizations are simple name changes and should not
result in any taxable exchange under Internal Revenue Code
Section 1036.
I The IRS and Collection Issues
A. IRS Office of Chief Counsel states that there is “much confusion
concerning collection issues involving Limited Liability
Companies — LLCs. The following guidance has been issued in
Chief Counsel Memorandum 200235023:
B. When a single-member limited liability company is treated as a
disregarded entity, the IRS cannot satisfy a tax lien against
the LLC’s owner with the LLC’s assets.
C. Determination of federal taxation of LLCs.
1. In analyzing an LLC’s federal tax liability, the Chief Counsel’s
Office stated that the first consideration is whether the LLC
is a single-member LLC or a multi-member LLC.
2. If the LLC is a multi-member LLC, the next consideration is
whether it is taxed as a corporation or a partnership.
D. Taxed as a corporation.
I. Taxed as a corporation, the memorandum advises that the IRS
should not file a Notice of Federal Tax Lien against the
members of the LLC, as they are not the taxpayer.
2. If the LLC incurs an employment tax liability, the IRS may
instead assert the §6672 trust fund recovery penalty against
a member who qualifies as a responsible person.
F. Taxed as a partnership.
I. Taxed as a partnership, the IRS advises that it could incur an
employment tax liability as an employer. If that is the case, the
IRS would file a NFTL against the partnership.
2. Chief Counsel also concluded that, because of state law
definitions of LLCs, the IRS cannot collect an employment tax
liability from an LLC member, even though the LLC is treated
as a partnership for federal tax purposes, as the members
have no derivative state law employment tax liability. All
members of an LLC are limited members.
3. For this reason, Chief Counsel has concluded that liability
should not be filed against the members, but solely in the
name of the partnership as the taxpayer.
4. However, Chief Counsel went on to state that the IRS should
consider asserting the trust fund recovery penalty against
members, depending upon the facts and circumstances of the
case.
F. Taxed as a Single-member LLC — Corporation.
I. If the Single-member has “elected” to be taxed as a
Corporation, the LLC is treated as a separate legal entity that
accrues its own tax liability and the IRS may collect that
liability only from the LLC’s assets.
2. A Form 941 employment tax liability may allow the IRS to
assert the trust fund recovery penalty against any
responsible person, which in some situations may include the
single-member owner.
NOTE: In the CCM it was noted that the single-member owner ic not necessarily or automatically a responsible person but rather the facts of the case would so dictate.
G. Taxed as a Single-member sole proprietorship.
1. The CCM notes that, regardless of whether an assessment of
a disregarded LLC contains the name and/or taxpayer
identification number of the single-member owner or the name
and TIN of the disregarded LLC, the assessment is valid
against the single- member owner.
2. The IRS would have the ability to file a NFTL and could
enforce it against the member’s property and rights to
property.
H. Taxpayer’s property and rights to property do not encompass the LLC’s property.
1. Drye v. United States, 528 U.S. 49(1999)
2. Chief Counsel’s Office concluded that the single-member
owner has no property or rights to property in the LLC’s
assets because one looks to state law to determine a
taxpayer’s interest, and, under state law, the taxpayer has
no interest in the LLC’s property.
3. As a result, the Chief Counsel’s Office has recommended:
a. IRS should levy upon the member’s ownership interest in
the LLC and sell that interest, or
b. File suit to foreclose the federal tax lien against the.
ownership interest.
IV. Conclusion
For assistance from the Internal Revenue Service on Limited Liability Company matters, contact:
Philadelphia Service Center
215-516-7288 Between 7:00 am and 2:00 pm
215-516-3030 Between 3:00 am and 6:00 pm
or your Attorney, Accountant or Tax Professional
NOTE: The choice of entity and federal tax classjfication is not to be left to chance. Tax professionals are the “experts” however there is no substitute for knowing the needs, wishes and desires of of you there cleints.
THE LIMITED LIABILITY COMPANY MAY BE THE ANSWER, THEN AGAIN, MAYBE NOT.
PART III LLC'S THE UGLY
1. Improper formation of the LLC- Failure to meet taxpayers needs
A. When the LLC is not the proper formation:
1. Business operates crossing muttiple state jurisdictions
2. Costs are Prohibitive---Insurance vs LLC
3, Membership interests in an LLC may not be publicly traded
NOTE:
(The LLc may be taxed as a corporation if the interests are publicly traded unless at least 90 percent of its income is specified passive income and centain other requirements are meet)
4, Automatic dissolution- The LLC may dissolve upon the loss of a member unless a majority or all of the remaining members agree to continue the business as a LLC.. This makes LLCs unattractivefor large organization, thos with many investors. The operating agreement for the LLC should address business continuance upon loss of a member.
B. SINGLE MEMBER LLC UNDER ATTACK
1. These are actual cases that were heard before both the IRS and State department of Revenues
Aibright, a Colorado case where a debtor in bankruptcy was the sole owner of a Colorado LLC. A argued that under Colorado’s LLC statute the property in the LLC should be protected from sale by the trustee and, at most, the trustee should be able to obtain a charging order.
The court disagreed and allowed the trustee to sell the property in the LLC. The decision was based upon the fact that there were no “other:members in the LLC. The Colorado statute is written to protect “other” members and requires unanimous approval of the “other members” when a transfer of ownership is imminent. The statute protects all interested parties and prevents them from having to work with a party of when they do not approve, i.e., a creditor. Because A LLC was a single- member, there were no “other members” to protect and ownership could be transferred to the bankruptcy trustee.
Now the 6 Circuit of Appeals has again attacked sing-member LLC ownership, this time the court discussed taxation of the entity.
In Liltriello v. United Slates, et al. the court held that owners of single- member LLCs must “check the box” in order to be treated as a corporation for tax purposes.
If the owner of a single-member entity does not “check the box” they will be taxed at the default status which is that of a sole proprietorship. And, along with that comes sole proprietorship liability.
Littriello was the owner of several single-member LLCs and the court held that he had not elected to have the entities treated as Corporations so the entities were treated as sole proprietorships and he was responsible for the LLC’s liabilities.
He did not “check the box” because he wanted to avoid the double-tax consequences of corporate status. Doing so does avoid double taxation because it keeps the owner at the default status of sole proprietorship where the owner is taxed one time in his tax bracket. Because he defaulted to ownership as a sole proprietor to avoid the double taxation of the Corporation he also missed out on the protections that come along with a properly setup entity from an asset protection standpoint. The case tells us of the importance of education and proper planning.
C. Failure to make an election.
1. The taxpayer or their advisor fails to file Form 8832 or Form
5523, electing to be taxed as a Corporation or as an S
Corporation.
2.The taxpayer has paid salary in way of a W-2 to himself as if
the LLC was a Corporation, C or S.
3.The March 15 filing due date has passed for the “late
election” under Rev. Proc. 2002-59.
NOTE:The current Rev. Proc. only allows a late election until the original due date of the return with no extensions. A Private Letter Ruling may be the only avenue for your taxpayer.
4. Resulting amendment to Forms 941, 940, W-2’s and State
Wage and Unemployment Reporting may be required as the
default provision of Sole Proprietor or Partnership will be
required without the initial or valid late election.
NOTE: Failure to file the ‘S’ election, Form 2553, may be equally problematic.
D. Mergers and Conversions gone bad.
1. Existing C or S Corporation wishes to merge or convert into
the LLC taxed as a C or S Corporation.
2. The LLC must be formed with a new EIN.
3. The LLC must “elect” to be taxed as either a Corporation or
an S Corporation, the minor image of the to be merged or
converted C or S Corporation.
4. Merger or conversion documents must be written to effect
the merger or conversion.
5. The resulting LLC will be the entity yet retains the old
entities
EXAMPLE: JOHN is the sole shareholder in WIDGETS, INC. He has not acted as a Corporation, has had no meetings with the shareholder or members of the Board of Directors. There are no Corporate Minutes. He signs all documents as an individual.
The Corporate Federal Tax Classification is advantageous to John but all of the legalese is not and you frar that the “corporate veil” would be pierced for failure to act as a Corporation.
You form the LLC, Widgets Inc. Your attorney writes the merger or conversion documents to merge the INC into the LLC. However, your attorney fails to make the Form 8832 “election” to have the LLC taxed as a Corporation. Therefore the merger is of a Corporation into a Sole Proprietorship — a complete “liquidation” of the Corporation.
One question remains, does your attorney have Errors and Omissions insurance?
6.“F” reorganizations are simple name changes and should not
result in any taxable exchange under Internal Revenue Code
Section 1036.
I The IRS and Collection Issues
A. IRS Office of Chief Counsel states that there is “much confusion
concerning collection issues involving Limited Liability
Companies — LLCs. The following guidance has been issued in
Chief Counsel Memorandum 200235023:
B. When a single-member limited liability company is treated as a
disregarded entity, the IRS cannot satisfy a tax lien against
the LLC’s owner with the LLC’s assets.
C. Determination of federal taxation of LLCs.
1. In analyzing an LLC’s federal tax liability, the Chief Counsel’s
Office stated that the first consideration is whether the LLC
is a single-member LLC or a multi-member LLC.
2. If the LLC is a multi-member LLC, the next consideration is
whether it is taxed as a corporation or a partnership.
D. Taxed as a corporation.
I. Taxed as a corporation, the memorandum advises that the IRS
should not file a Notice of Federal Tax Lien against the
members of the LLC, as they are not the taxpayer.
2. If the LLC incurs an employment tax liability, the IRS may
instead assert the §6672 trust fund recovery penalty against
a member who qualifies as a responsible person.
F. Taxed as a partnership.
I. Taxed as a partnership, the IRS advises that it could incur an
employment tax liability as an employer. If that is the case, the
IRS would file a NFTL against the partnership.
2. Chief Counsel also concluded that, because of state law
definitions of LLCs, the IRS cannot collect an employment tax
liability from an LLC member, even though the LLC is treated
as a partnership for federal tax purposes, as the members
have no derivative state law employment tax liability. All
members of an LLC are limited members.
3. For this reason, Chief Counsel has concluded that liability
should not be filed against the members, but solely in the
name of the partnership as the taxpayer.
4. However, Chief Counsel went on to state that the IRS should
consider asserting the trust fund recovery penalty against
members, depending upon the facts and circumstances of the
case.
F. Taxed as a Single-member LLC — Corporation.
I. If the Single-member has “elected” to be taxed as a
Corporation, the LLC is treated as a separate legal entity that
accrues its own tax liability and the IRS may collect that
liability only from the LLC’s assets.
2. A Form 941 employment tax liability may allow the IRS to
assert the trust fund recovery penalty against any
responsible person, which in some situations may include the
single-member owner.
NOTE: In the CCM it was noted that the single-member owner ic not necessarily or automatically a responsible person but rather the facts of the case would so dictate.
G. Taxed as a Single-member sole proprietorship.
1. The CCM notes that, regardless of whether an assessment of
a disregarded LLC contains the name and/or taxpayer
identification number of the single-member owner or the name
and TIN of the disregarded LLC, the assessment is valid
against the single- member owner.
2. The IRS would have the ability to file a NFTL and could
enforce it against the member’s property and rights to
property.
H. Taxpayer’s property and rights to property do not encompass the LLC’s property.
1. Drye v. United States, 528 U.S. 49(1999)
2. Chief Counsel’s Office concluded that the single-member
owner has no property or rights to property in the LLC’s
assets because one looks to state law to determine a
taxpayer’s interest, and, under state law, the taxpayer has
no interest in the LLC’s property.
3. As a result, the Chief Counsel’s Office has recommended:
a. IRS should levy upon the member’s ownership interest in
the LLC and sell that interest, or
b. File suit to foreclose the federal tax lien against the.
ownership interest.
IV. Conclusion
For assistance from the Internal Revenue Service on Limited Liability Company matters, contact:
Philadelphia Service Center
215-516-7288 Between 7:00 am and 2:00 pm
215-516-3030 Between 3:00 am and 6:00 pm
or your Attorney, Accountant or Tax Professional
NOTE: The choice of entity and federal tax classjfication is not to be left to chance. Tax professionals are the “experts” however there is no substitute for knowing the needs, wishes and desires of of you there cleints.
THE LIMITED LIABILITY COMPANY MAY BE THE ANSWER, THEN AGAIN, MAYBE NOT.
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