Planning Considerations When Converting a C Corporation to an LLC

The owners of a C corporation might consider a conversion to a passthrough entity as a means to retain the limited liability and transferability of ownership that the corporate entity provides, while avoiding the double taxation of corporate earnings. As a profitable corporation matures, it becomes more difficult to "zero out" corporate taxable income through shifting devices such as salaries, fringe benefits, and interest payments.

In the conversion of a C corporation to a limited liability company (LLC), the transaction is treated as a liquidation of the corporation, followed by a liquidating distribution of the net proceeds to the shareholders. The assets are then contributed to the new LLC.

After the conversion, the new LLC takes its assets with a fair market value basis. Other corporate tax attributes are eliminated. Operating results going forward, as well as the eventual liquidation of the LLC, are now single-taxation events.

Keywords: C Corporation, LLC, conversion, limited liability, self-employment, double taxation, goodwill

JEL Classification: E62, H21, H25, K34

Suggested Citation: Suggested Citation

Everett, John and Raabe, William A. and Hennig, Cherie, Planning Considerations When Converting a C Corporation to an LLC (February 1, 2011). The Tax Adviser, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2368860