Convertidor De Video Sin Limite
Teodolinda Mattson
A domestic partnership or limited partnership may be converted into an existing limited liability company or into a new formed limited liability company by filing a Certificate of Conversion pursuant to Section 1006 of the New York State Limited Liability Company Law.
A domestic (California) stock corporation (Corp) can convert to a California other business entity or foreign entity if the conversion is permitted under the laws of the jurisdiction of the foreign entity; a California limited liability company (LLC), limited partnership (LP) or general partnership (GP) can convert to a California or foreign other business entity; and a foreign business entity can convert to a California Corp, LLC, LP or registered GP if the conversion is permitted under the laws of the jurisdiction of the foreign business entity. (California Corporations Code commencing with Sections 1150, 3300, 15911.01, 16901 and 17710.01.) All statutory references below are to the California Corporations Code.
The document must be signed and acknowledged by the chairman of the board, the president or any vice president AND the secretary, the chief financial officer, the treasurer or any assistant secretary or assistant treasurer. (California Corporations Code section 1155(b) or 3304(b).)
The document must be signed and acknowledged by all members of a member-managed limited liability company or all managers of a manager-managed limited liability company, unless a lesser number is provided in the articles of organization or the operating agreement. (California Corporations Code section 17710.06(b).) Note: Signing a document on behalf of a converting LLC constitutes an affirmation under penalty of perjury that the facts stated in the document are true. (California Corporations Code section 17702.07(c).)
The document must be signed and acknowledged by all general partners. (California Corporations Code section 15911.06(b).) Note: Signing a document on behalf of a converting LP constitutes an affirmation under penalty of perjury that the facts stated in the document are true. (California Corporations Code section 15902.08(b).)
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Only infrequently will it be beneficial for a C corporation to convert into a limited liability company (LLC). Although a conversion allows the C corporation shareholders to continue to have limited liability while acquiring the advantages of passthrough taxation, the tax cost of the conversion normally will be prohibitive. However, in certain situations, a conversion to LLC status may be beneficial.
Warning: The conversion of a corporation into an LLC classified as a partnership can have unexpected and unintended results. For example, in K.H. Co., LLC, T.C. Memo. 2014-31, the Tax Court disqualified an ESOP established by a corporation that subsequently converted to an LLC. Interests in the LLC did not meet the requirements to be qualifying employer securities.
Under Sec. 336, a liquidating C corporation must recognize gain or loss on distributions of property to the shareholders as if the property had been sold to them for its fair market value (FMV). The character of the gain recognized (capital versus ordinary) depends on the character of the property distributed. (Depreciation recapture and similar rules may also affect the character of the gain recognized.) Generally, corporations are allowed to recognize losses when property is distributed to shareholders in complete liquidation of the corporation. However, a corporation making a liquidating distribution to a related person (under the rules of Sec. 267) cannot recognize the loss if the distribution is not pro rata or disqualified property is distributed.
Non-pro rata distribution: Sec. 336(d)(1)(A) disallows corporate recognition of loss on certain distributions to a related person. A shareholder is related to the corporation under Sec. 267 if he or she owns, directly or indirectly, more than 50% in value of the outstanding stock. However, this rule does not apply if the property is distributed pro rata to all shareholders and the property was not acquired by the corporation in a Sec. 351 transaction or as a contribution of capital within the five-year period ending on the date of the distribution. Or, if the shareholders hold unequal percentages of stock, the loss assets can be distributed to the shareholders who do not meet the definition of a related person.
Distribution of disqualified property: Sec. 336(d)(2) covers distributions with a tax-avoidance purpose and can apply even if the loss property is distributed to a 50%-or-less shareholder. Built-in loss property acquired by the corporation in a Sec. 351 transaction or as a contribution of capital within two years of adopting the plan of liquidation is presumed to be tainted. If this anti-abuse rule applies, the basis of the distributed property for computing the loss is reduced by the built-in loss that existed on the date the property was contributed to the corporation. One obvious way to sidestep this rule is to wait until the two-year period has passed to adopt the plan of liquidation. Or the practitioner could attempt to overcome an IRS assertion that a principal reason for the transfer was to create a corporate loss, by proving a valid business reason for the original transfer of the property to the corporation.
Sec. 331 requires a liquidating distribution to be treated as full payment in exchange for the shareholder's stock. The shareholders must recognize gain (or loss) equal to the difference between the FMV of the assets received and the adjusted basis of the stock surrendered. If the stock surrendered is a capital asset, the transaction results in the recognition of capital gain or loss. The shareholder's basis in the property received in the liquidating distribution is its FMV at the time of distribution if gain or loss is recognized on the receipt of the property (Sec. 334(a)).
Because there may be a high tax cost to convert a C corporation with significantly appreciated assets, practitioners probably will only want to consider conversion if circumstances limit the gain that will be recognized by the corporation on the distribution of its assets and/or the gain that will be recognized by the shareholders from the liquidating distribution. In general, a corporate conversion may be desirable in the following situations:
The corporation holds assets that have not appreciated or have depreciated: In such situations, the FMV of the property distributed does not exceed the basis of the transferred assets, and the corporation does not recognize gain. Additionally, the FMV of the assets distributed to the shareholders most likely will not exceed the basis of their stock, and gain recognition will not be required at the shareholder level.
The corporation and/or its shareholders have net operating losses (NOLs) or capital loss carryforwards that absorb any gain recognized on the liquidating distribution: Shareholders may have capital loss carryforwards from other activities or investments that can be used to offset the gain. Furthermore, the corporation may have NOL or capital loss carryforwards that can offset some or all of the corporation's gain on the deemed sale of assets associated with its liquidating distribution.
The corporation holds assets that will appreciate rapidly in the future (such as a potential patent, intellectual property, or real estate): If significant appreciation is expected in the future, it may be preferable to recognize the taxable gain on liquidation of the corporation now to avoid double taxation on future appreciation.
Note: If the converting corporation's assets have depreciated and losses on the liquidating distribution will not be limited because of the related-party rules, the conversion of a C corporation to an LLC may actually have beneficial tax effects.
Two Tax Court decisions highlight one way to at least partially avoid double taxation on a corporate liquidation. The existence of goodwill or other valuable intangibles that are the property of the shareholders, not the corporation, is required for these strategies to work.
In Martin Ice Cream, 110 T.C. 189 (1998), the corporation distributed Hagen-Dazs ice cream to supermarkets, grocery stores, and food-service accounts. Arnold Strassberg was the 51% owner of the corporation and had long-standing relationships with owners and managers of supermarket chains. He did not have an employment contract with the corporation nor did he sign a covenant not to compete.
The Tax Court held that Strass-berg's oral distribution agreement with Hagen-Dazs and his relationships with the supermarket chains were not owned by the corporation. He owned these intangibles and made them available to the corporation by working for it. The Tax Court's decision may have been influenced by the lack of a written distribution agreement between the corporation and Hagen-Dazs and the absence of a contract preventing Strassberg from competing with the corporation.
In Norwalk, T.C. Memo. 1998-279, the IRS argued that a professional accountancy corporation owned approximately $580,000 of intangibles when it liquidated. However, the Tax Court concluded that any customer-based intangibles belonged to the firm's shareholders because their clients could be expected to follow them if they left the firm. According to the Tax Court:
The goodwill associated with the practice was not a component of the corporation's value but rather was a personal asset of the shareholders. Further, the corporation's client list was held to have no value in the hands of the liquidating corporation because no noncompete agreement with the corporation was effective against the shareholders. Therefore, the shareholders were free to take the corporation's clients and serve them individually, rendering the client list valueless to the liquidating corporation.
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