Changing Horses in Midstream: Tax Conversions Related to Texas LLCs

Business Attorneys Assisting Texas LLCs with Tax Conversions

Business owners often find that the flexibility afforded to a Texas Limited Liability Company (LLC) make that legal form ideal for a new enterprise. Sometimes – even years later – when the business has matured, they may determine that the original arrangement no longer meets their needs, particularly from a taxation standpoint. Is it possible to changes horses in midstream? While the issues are complex and unique to each business arrangement, business owners might want to consider a “tax conversion” of their LLC operation.

Texas Limited Liability Companies

In Texas, the LLC is neither a partnership nor a corporation yet, properly created, it can operate as:

  • A general partnership with limited liability
  • A limited partnership within which owners are still free to engage in management and yet, still have limited liability, or
  • An “S” corporation, but without the ownership and tax restrictions that are imposed by the IRS

Generally speaking, the LLC’s “members” – that’s what the owners are called – have limited liability and yet enjoy the pass-through tax treatment afforded to “partners” in a partnership. Once the business becomes truly profitable, however, you may not want that income to pass through and be taxed at individual federal income tax rates, particularly if some or all of it needs to be retained within the business to support additional growth. In other situations, the LLC may need new investors who may condition the contribution of capital upon the LLC’s decision to jettison pass-through treatment afforded to members. In those situations, a tax conversion may be the ticket.

Tax Conversion of the LLC

A tax conversion of an LLC is possible since the IRS does not recognize an LLC as a taxing entity in any event. That is to say, unless a special election is made, the IRS treats a single-member LLC as a sole proprietorship, with income and losses flowing through to that member’s tax return. It treats a multiple-member LLC as a partnership.

The LLC can, by use of IRS Form 8832, elect to be taxed as a corporation. An important note: The legal structure of the Texas LLC need not be changed at all. For liability and other purposes, the entity is still an LLC. It is, however, taxed as a corporation.

Changing Horses Requires Careful Consideration

Changing the tax status of an LLC can involve complex issues. The members should carefully consider all important individual tax issues before making the decision. Depending upon your business situation, such a tax conversion could make sense.

Romano & Sumner: Skilled Attorneys Who Think Outside the Box

Texas BarToday Top Ten BadgeDo you have concerns that your company’s governance structure is not adequate? Have you taken in new investors whose interests are not necessarily aligned with those of the fledgling business? Do you need to consider a tax conversion?

The attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of complex business planning, tax planning, wealth management, and business operations. At Romano & Sumner, we pride ourselves not only upon our professionalism, but upon our client service. We know that each situation is unique. We return phone calls within one business day. We keep clients informed. We complete the work within the allotted time frame. Call us at 281-242-0995 or complete our online contact form.

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    Romano & Sumner, PLLC

    Romano & Sumner, PLLC