Tax consequences of liquidating a partnership
With few exceptions, proprietorship and partnership conversions can be accomplished tax-free. There may be issues other than federal tax issues to consider, depending on state law.Conversions from a corporation to a different entity can involve a corporate liquidation. Other issues may include homestead exemption, franchise tax, filing new articles of organization, and filing new mortgages or other documents to secure debt.Do the tax and nontax strengths outweigh the tax and nontax costs of the conversion?Tax costs are dramatically different for each of the different tax entities.Conversion of an S corporation to another entity such as an LLC has similar tax consequences at the corporate levelgain or loss is recognized on sale or distribution of assets at fair market value.However, gain recognized by the corporation passes through to the shareholders and increases the shareholders basis in their shares of stock, which reduces their gain upon liquidation of the corporation.This material discusses the various types of change and what tax liability can be expected.First, is it even possible to get from the current entity to the new entity?
However, if the assets and stock have depreciated rather than appreciated, it may be clearly advantageous to liquidate. There are exceptions and special rules for contributions of debt and contributions of services.Conversion of a C corporation to an LLC can create significant negative tax consequences.Liquidation can be taxable to both the corporation and its shareholders.When a sole proprietorship is converted to a one-member LLC, the LLC is disregarded for tax purposes unless the member elects to have it taxed as a corporation. If an interest in an LLC is issued in exchange for services, the exchange is taxable if the interest is an interest in capital and may be taxable if it is an interest in profits only.The sole proprietor can contribute all of the assets of the business, subject to the associated liabilities, to the newly formed entity. How a sole proprietorship converted to an LLC will be treated for federal tax purposes depends on the number of members and the check-a-box election.