LLC Dissolved

[David]

2 member LLC is being dissolved and one of the members is continuing his law practice as a PC.

 

I'm sure that the new business can't use the same EIN, or can it?

 

Also, the client says that sometimes receivables aren't paid for 3 years.

 

Typically, how is this handled? Does the inactive LLC maintain the bank account for as long as it takes to receive all receivable payments?

 

How have those of you involved in dissolutions advised your clients regarding this?

 

Thanks.

[Lee B]

I believe that a new EIN is needed.  The LLC is terminated and the assets and liabilities would be distributed to

 

the members including the receivables according to their membership interest percentages. Depending how

 

the LLC was started and what the members contributed to the LLC the termination could be fairly

 

straightforward or somewhat convoluted.

Edited January 26, 2015 by cbslee

[David]

Thanks for your help.

 

What about the receivables not being paid until 3 years later? The LLC would be inactive but wouldn't they have to keep the bank account open until all receivables are paid?

[Lee B]

Thanks for your help.

 

What about the receivables not being paid until 3 years later? The LLC would be inactive but wouldn't they have to keep the bank account open until all receivables are paid?

 Remember the receivables have been distributed to the former members, the bank account would not remain open.

Each member would collect his own receivables.

[Gail in Virginia]

 Remember the receivables have been distributed to the former members, the bank account would not remain open.

Each member would collect his own receivables.

Or if one member is continuing in the same business,it is possible he or she might want to buy some of the assets, which might or might not include the receivables.  But then we are back in convoluted territory.

[Richcpaman]

Gail:

 

You could continue the "old" LLC while the A/R is collected and the $ split between the former partners that way and file returns each year, and then set up a new LLP/Sole-Prop/PC for the continuing attorney.  If the continuing attorney is going to get all the $ from the A/R and not share them with the departing partner, then you may have an issue with "hot assets" but Since the continuing attorney is recognizing them as ordinary income, you don't have that big a problem.

 

Rich

[David]

This is a friendly partnership/LLC dissolution. One of the attorneys is going back to the DA world and the other is continuing on. The attorney that is continuing wants to operate as a PC electing S Corp status. 

 

The continuing attorney is fine with assuming all receivables and debt and wants to give the departing partner his $2K original capital contribution. 

 

The effective date of the dissolution, unless there is a more favorable date, is 1/31/15. 

 

In order to do what the two attorneys want can the 2014 tax return show a change in % allocation for assets and liabitlities where the departing member has 0% assets and liabilities and keep the 50% allocation for profits and losses?

 

However, since this is a technical termination won't the remaining attorney have a taxable event because he won't be able to transfer those receivables, assets and liabilities to his PC? Or can he transfer everything to his PC and not incur taxes?

 

Thanks for your help.

[DANRVAN]

It looks like you will need to follow the rules for liquidating distributions to both partners since the partnership will no longer exist.

[kcjenkins]

I think Dan is right on the money here.  And attorneys already understand the need to 'keep it legal', so you won't have that problem. No need to keep the bank account, just send letter to the relevant parties stating that the receivable has been transferred from XYZ LLC to  Bob X, PLLC [or PA, or Corp], etc.  and where to send their payments.  

[BulldogTom]

Wouldn't it be easier for everyone if the remaining partner purchased the leaving partner's interest for 2K?  Then, because the partnership has terminated, the remaining partner, as the only person remaining, will be able to work with the bank, and collect all the receivables, keep the client list, etc. I am going way back in my memory bank here, but I think a dissolved partnership that dissolved only because of the withdrawal of a partner, can keep the EIN's for the business.

 

Something about a tax free transfer from one business to another with all the basis remaining the same.  I am stretching my memory here, but I seem to remember that there is a code section that allows the tax free transfer of business assets if the partnership is no longer a partnership but is still an ongoing business.

 

Please correct me if I am wrong.  It would make it much cleaner to do it that way.

 

Tom

Newark, CA

Edited January 26, 2015 by BulldogTom

[kcjenkins]

Tom, I think you are referring to the type of real termination where a multi-member LLC becomes a single-member LLC.

 

Rev. Rul. 99-6 8 states that the partnership will terminate under §708(b )(1)(A) because the
entity no longer has two or more members.

 

I would suggest the most useful reference here would be 

 

http://www.irs.gov/Businesses/Partnerships/Partnership---Audit-Technique-Guide---Chapter-7---Dispositions-of-Partnership-Interest-(Rev.-3-2008)

[David]

The remaining LLC member would love to continue on and transfer all receivables assets and liabilities to his new PC without a taxable event.

 

I don't think that is possible is it, since this is a technical termination? Or is there a way for everything to transfer tax free to the remaining member's PC?

 

Both members are fine with the remaining member keeping all receivables, debt and other assets and liabilities and just returning the departing member's $2K capital contribution.

[BulldogTom]

I think there is.  Look at §351 for the beginning of your search.  Then look at Rev Rul. 84-111 and Rev Rul 2004-59.

 

I am not an expert on this, but I did a little digging around and I think you can get a tax free conversion of the partnership into a Corporation.  The basis in the stock will then be the basis in the partnership interest.  After the conversion to a corporation, the departing member can sell his stock to the remaining member.   I think you can elect S status as well at the same time.  You might even be able to execute a buy sell agreement in the corporation articles to facilitate the immediate transfer of the shares at a predetermined price.

 

I really think this can be done.  Perhaps the partners have a buddy who specializes in Corp Formations to help them out.

 

Read the article from the link below and then see if you think this can be done.

 

http://fedtaxdevelopments.foxrothschild.com/2010/08/articles/federal-tax-rulings/review-of-incorporation-of-a-partnership-rev-rul-84111-19842-cb-88/

 

Tom

Newark, CA

[BulldogTom]

Tom, I think you are referring to the type of real termination where a multi-member LLC becomes a single-member LLC.

 

Rev. Rul. 99-6 8 states that the partnership will terminate under §708(b )(1)(A) because the

entity no longer has two or more members.

 

I would suggest the most useful reference here would be 

 

http://www.irs.gov/Businesses/Partnerships/Partnership---Audit-Technique-Guide---Chapter-7---Dispositions-of-Partnership-Interest-(Rev.-3-2008)

 

I think if they convert before the first partner withdraws, they can do the conversion tax free, and then the leaving shareholder can sell to the remaining shareholder.

 

Tom

Newark, CA

Edited January 30, 2015 by BulldogTom

[David]

Ok. The banker filed a conversion with the Sec. of State to convert the LLC to a corporation and to change the name. He also got a new EIN for the entity because he thought he needed to. I talked to the banker and he said the account can use the original EIN instead of the new one if we needed them to .

 

Since this was done I think I can do the following:

 

File for S Corp election effective 1/1/15.

SH B terminates his SH interest 1/31/15.

File a name change from A and B LLC to A Law Firm, PC.

Keep the original EIN.

 

Does anyone see a problem with my thinking? 

 

What form do i use to make the name change? Do I do this before the 2553 is filed or after?

 

Thanks.

[kcjenkins]

There is a box on both the 1065 and the 1120 for a name change.  

 

If you are filing a current year return, mark the appropriate name change box of the Form 1120 type you are using:

Form 1120:  Page 1, Line E, Box 3
Form 1120S:  Page 1, Line H, Box 2

If you have already filed your return for the current year, write to IRS at the address where you filed your return to inform them of the name change.  In addition, the notification must be signed by a corporate officer.

 

If you are filing a current year Form 1065, mark the appropriate name change box on the form:  Page 1, Line G, Box 3.
If you have already filed your return for the current year, write to IRS at the address where you filed your return to inform them of the name change.  In addition, the notification must be signed by a partner of the business.

 

In some situations a name change may require a new Employer Identification Number (EIN) or a final return.  See Publication 1635, Understanding Your EIN, to make this determination.

[David]

KC, thanks so much for your help.

[David]

KC, I just realized that we will be processing payroll deposits, 941s, etc for Q1.

The name change isn't effective until 2/1/15 so, if I understand you correctly the 2014 tax return will still be a 1065 with the old name. When I file the 2553 with an effective date of 1/1/15, the old name will still be listed.

I won't change the name until we file the 2015 1120S next year.

If we use the new name on payroll reports beginning 2/1, the IRS will more than likely be confused. Is there a form to file when we prepare payroll reports that show the new company name?

Thanks.

[kcjenkins]

I would make the change on the 2014 return, myself, since you will be filing it after the change has been made.  Or you are going to have major headaches over the payroll tax reports, I think.  Once they process those, they will link up the 2553 to the new name.  If not, it's ONE FORM to explain, not all the multiple payroll forms.  

[David]

Thanks for you help, KC.