Limited Liability Companies, written by Elizabeth A. Case, CPA, Karen Garre-Lohnes, Esq.,  Jeffrey I. Rosenberg, Esq., John G. Schmalz, Esq., and Samuel P. Starr, CPA, Esq., of PricewaterhouseCoopers LLP, and Robert J. Crnkovich, Esq., Adjunct Professor at Georgetown University Law Center, focuses on the federal tax consequences of using a limited liability company (LLC) for conducting business operations. It is not a primer on the fundamentals of partnership taxation; other portfolios cover the details of partnership taxation, and this portfolio depends on them to some extent. 

This Portfolio compares LLCs to C corporations, S corporations, and partnerships as an alternative business form for tax purposes and summarizes the various uses of the LLC.  The Portfolio discusses the tax consequences of converting partnerships and corporations to LLC status, examining in detail the classification of the LLC and the unique federal tax consequences of using the LLC.  

Limited Liability Companies also discusses the choice of entity considerations (primarily the tax factors) that should be examined prior to selecting an LLC and focuses on the application of various tax rules to the LLC. In choosing an LLC, the members can elect maximum flexibility in making both fundamental and day-to-day business decisions including 

• structuring business operations and acquisitions
• employing financing techniques
• distributing earnings to members
• providing compensation and fringe benefits
• managing cash flow 

Analysis and commentary are provided to the tax practitioner to assist in resolving the tax issues encountered when using an LLC.

This Portfolio also analyzes compensation issues for the potential impact on LLC members. International use of the LLC is explored in detail and the state tax consequences are summarized to assist the tax practitioner in generalizing these consequences when using the LLC interstate. 

Limited Liability Companies allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Introduction: Choice of Entity Considerations

Introductory Material

A. LLCs Compared to Corporations

1. Limited Liability

2. Presence of Governing Board

3. Perpetual Life

4. Restrictions on Transferability

5. Familiarity

B. Tax Factors to Consider in Choosing the LLC

1. Tax Rate Differentials

2. Single-Tier Tax

3. Transfers of Appreciated Property

a. Transfers to Entity

b. Transfers from Entity

4. Corporate Alternative Minimum Tax

5. Entity Level Debt

6. Passive Activity Loss Rules

7. Special Allocations

8. Eligibility Requirements

9. Cash Method of Accounting

10. Taxable Year

11. Fringe Benefits

12. Accumulated Earnings and Personal Holding Company Taxes

II. Converting to LLC Status

Introductory Material

A. Existing Corporations

1. Existing C Corporations

a. Double Taxation

b. Form of Conversion

2. Existing S Corporations

3. Liquidation-Reformation as LLC

B. New Operations

C. Converting Personal Service Corporations to LLCs

D. Converting Partnerships to LLCs

1. Termination of Existing Partnership

2. Cash Method of Accounting

3. Unrealized Receivables and Inventory

4. Disguised Sales

E. Conversions under the Check-the-Box Rules

F. Conversions Involving Mergers and Divisions of Partnerships

G. Mergers of Corporate Entities and Disregarded Entities

III. Partnership Classification

A. Entity Classification after December 31, 1996: The “Check-the-Box” Regulations - General Approach

B. Business Entities

1. General Approach

2. Foreign vs. Domestic Entities

3. Distinguishing Trusts from Business Entities

4. Classifying a Post-1996 Business Entity

5. Entities with More than One Member

6. Clarifications Regarding Listed Foreign Per Se Corporations

7. Special Grandfather Rule for Pre-existing Foreign Business Entities

8. Redetermined Trusts

C. Classification of Eligible Entities

1. Ability to Elect Classification

2. Disregarded Entities

3. Election vs. Default

4. Default Rules for Domestic Entities

5. Default Rules for Foreign Entities

6. Limited Liability

7. Existing Eligible Entities

8. Making an Election

9. Limitation on Ability to Change Election

10. Deemed Election Rules

11. Manner of Signing and Authorizing an Election

12. Relevance of a Foreign Entity's Classification

13. Section 708(b)(1)(B) Termination

14. Change in Number of Owners

15. Revenue Ruling 99-5

16. Revenue Ruling 99-6

17. Elective Changes in Classification

18. Special Rules for Qualified Stock Purchase

19. Special Rules for Tiered Structures

20. Effective Date and Transition Rules

D. Prior Law - Partnership Classification Regulations

IV. Application of Partnership Rules to LLCs

A. Overview of Subchapter K

1. General Rules

a. Entity versus Aggregate Theories of Partnership Taxation

b. Partnership as “Taxpayer”

c. Formation of Partnership

d. Partnership Liabilities

e. Partnership Allocations

f. Partnership Distributions

g. Sales of Partnership Interests

2. Application of Partnership Rules to LLCs

B. Characterization of LLC Debt as Recourse or Nonrecourse

1. Character of Debt for Purposes of Subchapter K Rules

2. Impact of Deficit Restoration Obligation on Character of Debt

a. Introduction

b. Impact of DRO on Equity Allocations

c. Impact of DRO on Recourse Debt and Loss Allocations

(1) Absence of a DRO

(2) Guarantee; No DRO

(3) Presence of a DRO

C. Allocations of Debt, Income, Gain, Loss, Deduction, and Credit

1. Overview

a. Section 752: Debt Allocations

b. Section 704(b): Income and Loss Allocations

2. Allocations of Recourse Liabilities Under § 752

3. Allocations of Nonrecourse Liabilities Under § 752

a. Partnership Minimum Gain

(1) In General

(2) Application of Regulations to LLCs

b. Section 704(c) Minimum Gain

(1) Section 704(c) Overview

(2) Section 704(c) Minimum Gain Computation

(a) Multiple Properties Subject to Debt; State Law Recourse LLC Debt

(b) Use of § 704(c) Remedial Allocation Method

c. Excess Nonrecourse Liabilities

4. Allocations of Income, Gain, Loss, Deduction, and Credit Under § 704(b)

D. Death or Retirement from Service LLCs

1. Background

2. Impact of 1993 Changes to Service LLC Members

E. Administrative Partnership Provisions - Partnership Level Audits

F. Election Out of Subchapter K

V. Application of Other Technical Rules to LLCs

A. Cancellation of Debt Provisions

1. Overview

2. Character of Debt for Purposes of COD Income Rules

a. Non-Guaranteed “Recourse Debt”

b. Guaranteed “Nonrecourse” Debt

c. Summary

B. Passive Activity Rules

1. Treatment of Members as Limited or General Partners

2. $25,000 Active Participation Exception

3. Application of § 469(c)(7) Real Estate Rule

4. Grouping Activities

C. Use of Cash Method of Accounting

D. At Risk Rules

E. Like-Kind Exchanges

1. Overview

2. Application to LLCs

F. Capitalization of Transaction Costs

VI. Tax Treatment of Self-Employment Earnings, Fringe Benefits and Other LLC Compensation Issues

Introductory Material

A. Summary of the Self-Employment Rules

1. Limited Partners Not Subject to Self-Employment Tax

2. Is the LLC Member a General or Limited Partner?

B. Taxation of Fringe Benefits

1. Fringe Benefits Defined

2. Rev. Rul. 91-26

3. Other Fringe Benefits

4. Alternative Treatment

5. Self-Insurance

6. Summary

C. Other LLC Compensation Issues

1. Employee or Member?

2. Use of Deferred Compensation Arrangements

3. Equity-Based Compensation for Members

a. Capital Interests

b. Profits Interests

c. Forfeitures of Restricted Interests Under § 83

4. Options to Acquire LLC Interests

5. Use of Incentive Stock Options

6. Compensating Members with Corporate Member Stock

a. TAM 9822002 and PLR 9853038

b. Revenue Ruling 99-57

c. Section 1032 Regulations

VII. Foreign LLCs

Introductory Material

A. Classification of Foreign LLCs

B. Other Classification Issues for Foreign LLCs

1. Limitation on Foreign Entity Classification

2. Expansion of Per Se List to Include Foreign LLCs

C. Factors to Consider in “Choosing” U.S. Classification Status of Foreign LLCs

1. Transfers to LLCs

a. In General

b. Outbound Transfers to Corporations

c. Outbound Transfers to Partnerships

2. Deferral

a. In General

b. U.S. Corporate Status

(1) In General

(2) Subpart F

(3) Passive Foreign Investment Company

c. U.S. Partnership Status

(1) In General

(2) Income

(3) Expenses and Losses

(4) Passive Foreign Investment Company

(5) Partnership Tax Year

3. Foreign Tax Credit Implications

a. In General

b. U.S. Corporate Status

(1) Separate Foreign Tax Credit Limitations

(2) Deemed Paid Foreign Tax Credits and Third-Tier Rule

(3) Expense Allocation Rules

c. U.S. Partnership Status

(1) Separate Foreign Tax Credit Limitations

(2) Deemed Paid Foreign Tax Credits and Third-Tier Rule

(3) Expense Allocation Rules

D. Hybrid LLCs

E. Inbound Issues

1. Use of LLC Hybrids

2. Effectively Connected Income of § 884

3. Branch Profits Tax

F. Treaty Issues

1. Outbound Issues

2. Inbound Issues

VIII. State Tax Issues

A. In General

1. Corporate Taxes

a. Nexus

b. Structure

2. Individual Taxes

a. Residency

b. Structure

B. State Taxation of Pass-Through Entities

1. Recognition of Pass-Through Status

2. Non-Recognition of Pass-Through Status

3. State Taxation of Owners

a. Withholding for Nonresident Owners

b. Credits for Taxes Paid to Other States

c. Apportionment for Non-Individual Members

4. Other Business Taxes Affecting Pass-Through Entities

C. State Taxation of LLCs

1. In General

2. Characterizing LLCs as Corporations or Partnerships

3. States That Do Not Impose Corporate Income Taxes

4. Entity-Level Taxes on LLCs Classified for Federal Purposes as Partnerships

5. LLCs Taxable as Corporations

6. LLCs Taxable as Partnerships

a. Withholding for Nonresident Members

b. Composite or Consolidated Returns

c. Credits for Taxes Paid to Other States

7. Apportionment for Non-Individual Members

8. Other State Taxes

9. Real Estate Transfer Taxes

10. Franchise Taxes on Capital Values

Working Papers

Table of Worksheets

Worksheet 1 Delaware LLC Act

Worksheet 2 Sample LLC Operating Agreement [Maryland law]

Worksheet 3 Limited Liability Companies State-by-State Summary

Worksheet 4 REG-209824-96, 62 Fed. Reg. 1702 (1/13/97), Proposed Regulations on the Definition of Limited Partner for Self-Employment Tax Purposes

Worksheet 5 Rev. Rul. 99-5, 1999-1 C.B. 434

Worksheet 6 Rev. Rul. 99-6, 1999-1 C.B. 432

Bibliography

OFFICIAL

Statutes:

Treasury Rulings:

Cases:

UNOFFICIAL

Text and Treatises:

Periodicals:

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