Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Conversion of a partnership to a limited liability company (MS Word)
Conversion of a partnership to a limited liability company (.pdf)
Conversion of a partnership to a limited liability company
Dear Reader:
You have informed me that you and your partners have decided to
convert your general partnership to a limited liability company
(LLC) that would be taxed as a partnership and that you are
interested in what will be the tax effects of the conversion itself.
The conversion of a partnership to an LLC taxed as a partnership is
not treated as an exchange, regardless of how the conversion is
accomplished for state tax purposes. Thus, the conversion of the
partners' interests to LLC interests (1) doesn't result in gain or
loss to any of the partners, (2) doesn't affect the basis or holding
period of any of the partners in his interest, and (3) doesn't
terminate the partnership for tax purposes. Accordingly, the LLC
will continue to file partnership returns using the partnership's
employer identification number and tax year.
If the conversion results in a shift in the partners' shares of
partnership liabilities, the partners whose shares are increased are
treated as making contributions to the partnership that increase the
basis of their partnership interests, and the partners whose shares
are decreased are treated as receiving distributions from the
partnership that, first, reduce the basis of their partnership
interests to zero, and then, cause them to recognize gain to the
extent the reduction exceeds their basis.
The conversion of the partnership to an LLC may cause a change in
the partners' shares of the partnership's debts. For instance, since
no partner will be at risk for the LLC's liabilities, partnership
debts that were formerly recourse may become nonrecourse, affecting
the allocation of the debts. In addition, the creditors may, as a
condition of agreeing to the conversion, demand that some or all of
the partners guarantee the partnership's debts; these guarantees may
affect the allocation of the debts.
Therefore, in order to determine the effects of the conversion, it
is necessary to review the documents relating to the partnership
debts (including any loan agreements and guarantee agreements), as
well as the partnership agreement and the proposed LLC agreement.
With proper planning, we can ensure (subject to the business
arrangements among the partners) that any shift in the partners'
shares of partnership liabilities will not result in gain to any of
the partners.
Please call if you have any questions or if you want us to review
the relevant documents in order to ensure that no gain will result
from the conversion.