The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...
By Justin W. Stemple, Esq.
Warner Norcross & Judd LLP, Grand Rapids, MI
Many clients ask if they can adopt an employee stock ownership plan (ESOP) as a limited liability company (LLC) or if they must first convert to a corporation. The conventional answer has been that an LLC must convert to a corporate organization before adopting an ESOP. It's an employee "stock" ownership plan, after all. The conversion allows the company to have "qualifying employer securities," as defined in §4975(e)(8), which is one of the basic requirements for an ESOP.
The IRS, however, allows LLCs to be taxed as a corporation under the Internal Revenue Code for other purposes, so a reasonable argument can be made to allow treatment as a corporation for ESOP purposes. As it turns out, the IRS agrees. The IRS recently issued PLR 201538021 allowing an LLC to adopt an ESOP. This is the IRS of course, so the ruling included several conditions.
A private letter ruling may only be relied upon by the taxpayer requesting the ruling and private letter rulings must be inherently fact-specific. This ruling was very careful to recite certain aspects of the LLC that the IRS clearly wanted to emphasize in approving the LLC's request to adopt an ESOP. The IRS recited the following necessary features of the LLC:
The IRS concluded that because the LLC satisfies the above requirements, then it may adopt a tax-qualified ESOP. This ruling also suggests that an LLC must be structured similar to a corporation in order to adopt an ESOP. This begs the question: Is there any benefit to remaining an LLC rather than converting to a corporation before adopting an ESOP? In some cases, the conversion from an LLC to a corporation can be done in a tax-free manner with a carryforward of tax basis. But, in other cases, there are adverse tax consequences from the conversion that could provide reasons to avoid the conversion. An LLC wanting to adopt an ESOP should consider the downsides to converting to a corporation, the benefits to remaining an LLC and whether it should apply for a private letter ruling of its own.
For more information, in the Tax Management Portfolios, see Kaplan, Brown, and Granados, 354 T.M., ESOPs, and in Tax Practice Series, see ¶5560, Specialized Retirement Plans.
© 2015 Warner Norcross & Judd LLP.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)