EntityClassificationConversion

EntityClassificationConversion - ClassifyingandConverting...

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L. Andrew Immerman Alston & Bird LLP 404-881-7532 aimmerman@alston.com ABA Business Law Section April 12, 2008 Classifying and Converting  Business Entities: Basic Tax Issues
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2 Overview The tax rules for classifying business entities  are largely, but not entirely, independent of  state law categories. A partnership under state law may or may not  be a partnership for tax purposes. An LLC under state law will never be an LLC for  tax purposes – there is no such thing. However, a corporation under state law is  just  about  always a corporation for tax purposes.
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3 Overview If the tax classification rules seem confusing,  remember that we are almost always talking  about only three major classifications: Corporation. Partnership. Nothing. Nothing – i.e., "disregarded entity" – is actually  an important category.
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4 Before 1997 ("Four Factor" Test): LLCs were classified as partnerships or  corporations. If an LLC lacked two or more of the following  four "corporate" characteristics, it was  classified as a partnership: Continuity of life. Centralized management. Limited  liability  (liability  for  entity  debts  limited  to  entity property). Free transferability of interests.
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5 Starting 1997: ("Check the Box")  LLCs are classified as corporations or  partnerships, or sometimes as disregarded  entities (also known as "tax nothings"). The LLC's characteristics are generally  irrelevant to classification. Classification is now generally elective – the  LLC decides its own tax classification. LLCs cannot be classified as LLCs.
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6 What are the "Check the Box" Rules? A set of Treasury Regulations, effective  in 1997. Treasury Regulations §§  301.7701-1 to -4.  Authorize many business entities,  generally including LLCs, to choose  whether to be taxed as corporations or  partnerships (or sometimes as nothing).
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7 Do You Really Check a Box?  The choice is made by checking the  appropriate box on a Form 8832. Most businesses are satisfied with their  "default" classification (the classification  they are assigned if they don't file the form),  and so never literally "check the box."
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8 The Five Key Questions Is there an entity? If there is an entity, is it a business entity or a  trust? If it is a business entity, is it an eligible  entity? If it is an eligible entity, what is its "default"  classification? Has it properly elected a classification other  than the "default"?
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9 Is There an Entity?
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This note was uploaded on 05/04/2011 for the course ECON 222 taught by Professor Jeffery during the Spring '11 term at E. Stroudsburg.

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EntityClassificationConversion - ClassifyingandConverting...

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