Single member elects taxable as corp

[tax newbie1]

A client of mine has a single member LLC, however that single member is a LP. He wants to elect to be classified as an association taxable as a corporation. Is there anything that will prevent him from filling the form 8832? I know he can if that single member is a person, but not sure for a LC. Thank you for your help.

[kcjenkins]

I'm confused. You say first that single member is an LP, which I assume means Limited Partnership. Then later you call it an LC, which I don't have any idea what that means. And C and P are way apart on the keyboard, so don't think it was just a typo. Can you clarify?

[tax newbie1]

I'm confused. You say first that single member is an LP, which I assume means Limited Partnership. Then later you call it an LC, which I don't have any idea what that means. And C and P are way apart on the keyboard, so don't think it was just a typo. Can you clarify?

I'm sorry KC, it was a typo. I mean LP, Limited Partnership.

[OldJack]

Well... I'm still confused. A LP (limited partnership) must have more than one partner. So if a limited partnership owns the LLC it is a multi-member LLC since the LLC is disregarded. When you used LP do you mean an LLC member that has limited liability?

[tax newbie1]

KC and OldJack - sorry for the confusion. Let me try this again.

I have a client that operates an LP (not single member as I said below - that was a mistake). This limited partnership has a 100% member interst in three single member LLCs. All activity rolls up from the single member LLCs to the limited partnership. If we elect to treat each of the LLCs as S corporations (using Form 8832), can the LP own 100% of the LLCs taxed as S corporations?

As always, I appreciate your assistance

[jainen]

>>can the LP own 100% of the LLCs taxed as S corporations?<<

In my opinion, an S-Corp can not be owned by a partnership. In my opinion, you need to do some basic tax planning before you attempt such a complicated structure of interlocking entities.

[TAXBILLY]

KC and OldJack - sorry for the confusion. Let me try this again.

I have a client that operates an LP (not single member as I said below - that was a mistake). This limited partnership has a 100% member interst in three single member LLCs. All activity rolls up from the single member LLCs to the limited partnership. If we elect to treat each of the LLCs as S corporations (using Form 8832), can the LP own 100% of the LLCs taxed as S corporations?

As always, I appreciate your assistance

What is the purpose of doing this complicated maneuver?

taxbilly

[OldJack]

In my opinion, an S-Corp can not be owned by a partnership.

Not that I would recommend it but a partnership can hold S-Corp stock as a nominee for an eligible shareholder. [Reg 1.1361-1(e)(1)] Also, an S-corp (QSub status for each LLC) can be wholly owned by another S-corp (The LP electing S-Corp)[§1361( b )(3)( B )] [Reg. 1.1361-2, Reg. 1.1361-3].

Why not just have the individuals all own their share of each LLC? Keep it simple.

[kcjenkins]

I agree with Jack that it COULD be done, but really think it has quesitonable value to so complicate the situation. What is the logic behind structuring it in this convoluted way? [Other than increasing the accounting fees, of course. ]

[michaelmars]

we have layers like this all the time so partners can pass partnership interests to the kids etc, why the heck have an llc become an s corp. The beauty of llc is no payroll tax returns to deal with, with an s corp you need to set up p.r to get the money out with an llc you just pay it on the ITR's.

if its real estate you usually will be much better off when you sell in a llc over a s corp too.

[tax newbie1]

Thanks for all responses. To clarify a little bit - we did not set up the structure in this format. It was done before we begin doing the return. The way it is set up is actually not bad in that the attempt was to safeguard assets as the owner is a multi-millionaire with numerous holdings and business dealings. Without convuluting this conversation further, it was set up as follows: It has a GP up top that is a 1% General Partner of the LP (a husband and wife own 50% respectively of the GP and 49.5% of the LP). The LP owns a 100% member interest in the three separate LLCs. Of course, if we had been involved from the start, we could have recommended some other steps to simplify things (I'm like most of you, I like to keep it efficient, but as simple as possible), but we were not.

Having said that, if my client and his wife owned these single member LLC’s, it would be much easier as we could report them on their personal return. However, since the LP has a 100% member interest in those LLC’s, we have to report all of the LLC’s activity on the LP’s partnership return. This has created somewhat of a matching problem for the IRS because all of the form 1099’s were issued to the LLC’s. The IRS has no way of matching them with the 1065 return. That was the main reason for the intital questions on this topic and why we wanted to get some thoughts as to the suggestion that each of the LLC’s elect to be taxed as a corporation and report on its own. Then we could send the 1120S-K1s to the LP for the LP to report it on the 1065. That way the IRS can match all of the 1099s form to the respective 1120S return. Just a thought that we wanted to get some feedback on as the best way to avoid matching issues in the future.

Thanks

Newbie

[kcjenkins]

Well, that does make a bit more sense, seen in that light. Although I think the S corp election is still not necessary, you can work with what you have. Since they are disregarded entities, why not have them issue new W-9s using the LP's EIN instead? Then the income will be reported to the entity that is going to report the income, and thus no matching problem.

[OldJack]

if its real estate you usually will be much better off when you sell in a llc over a s corp too.

We all tell our clients "never put real estate in a corporation". We are actually talking about never put real estate in a C-corp or an S-corp that might default to a C-corp if the owner doesn't run it like an S-corp keeping things straight with the rules.

It is a myth that there is any tax difference when selling real estate in a S-corp (that has always been an S-corp) compared to selling real estate as proprietorship, partnership, or an individual. If its real estate used in business it goes on form 4797 and gain/loss flows with the same ending tax result to the 1040 in all cases. If its real estate held as investment it goes on Sch-D with the same result to the 1040.

[michaelmars]

DON'T Forget the tax effect of distributions on refi's

[OldJack]

DON'T Forget the tax effect of distributions on refi's

Also, don't forget the tax effect of single member LLC distributions on refi's.