Special Topics in Taxation
Author Note This paper was prepared for Special Topics in Taxation TAX 6877, taught by DR. Bunney L. Schmidt.
In following case study on Peachtree properties, Chris, Paula, and Toby want to form an LLC due to liability issues associated with a real estate business. They want an analysis on the advantages of an LLC versus and S corporation. They also want to know the steps in forming an LLC and how to convert a partnership to an LLC and what are the proper filing steps to achieve the overall goal. Once the LLC s formed they want to know the proper tax rulings and consequences of distributing interest among shareholders as an LLC based on numerous transactions to include the added and buying out shareholders and how to distribute interests.
Business Tax Client In the following case, Chris Paul, and Toby came together to form a real estate business known as Peachtree Properties. The business consist of two types of real estate investments, the first is to purchase empty land with the purpose of keeping it so that it will appreciate in value. The second type of investment is to purchase run down business buildings in a profitable location, fix and rent with the end intention of selling when the market price suits well enough to turn a profit on the initial investment. They began the real estate business on July 1, 2012 and contributed the following:
Chris invested a cash basis of 100,000 with a FMV contribution of 100,000.
Paula invested land that is undeveloped and held for 10 years with a tax basis of 10,000 and a FMV contribution of 100,000.
Toby invested a small building that is in need of better management and improvement with a tax basis of 65,000 and an FMV contribution of 100,000.
Chris, Paula, and Toby forming LLC The three owners want to form the business into an LLC opposed to an S corporation. They all have second jobs and they give 8-12 hours of their time for the business. Their decision to form a LLC is to protect themselves from liabilities involved with the real estate business. In they want to research and analyze what are the advantages of forming an LLC.
Analysis In conducting research of for the owners of Peach Tree Properties, I have found advantages for the right structure that would be beneficial versus a S corporation. The advantage of an LLC for a real estate business such as Peach Tree Properties can be a big difference for the real estate investor. An LLC does not have any restrictions to its shareholders. In respect with liability purposes in an LLC the income loss can be placed disproportionately between the shareholders.
The advantage of the LLC is the tax liability is less the liability to the shareholder. In contrast, an S corporation the liability of the business is passed through to the shareholders. This will depend how much the shareholders own and is what the liability will be based on. Both the income and loss are allocated to each shareholder depending on the amount of interest the shareholder owns within the company. In order for Paul, Chris, and Toby to form an LLC they would first have to file articles of incorporation for the state they want to form their business in. The organizer of the LLC will have to formulate an operating agreement where all the shareholders will agree to the LLC. Here is where each member will agree on his or her stake in the business. It is also advisable to hire an attorney to guide the owners on the legalities of the operation agreement. Since the owners of Peachtree have already formed their real estate company as a partnership and they want to convert their business to a LLC. Depending on state requirements they will have to file a certificate converting the partnership to a LLC and transfer all assets from the partnership to the LLC and