Can an S Corporation Own & Distribute Property Into an LLC Tax-Free?

An S corporation isn't technically a legal business entity. It's actually a tax designation that primarily corporations (although limited liability companies are also eligible) elect to eliminate shareholder tax liability on profits, or dividends. A company that's taxed as an S corporation can certainly distribute property it owns into an LLC. Whether property distributions are tax-free depends on whether the S corporation owns the LLC or not.

When LLC Is a QSub

  1. If the LLC is a qualified subchapter S subsidiary, or QSub, of your S corporation, distributing property into the LLC is tax-free since a QSub isn't treated as a separate entity for income tax purposes. Instead, the Internal Revenue Service taxes the LLC as if it liquidated all property into the S corporation. This means that the IRS won't view a distribution of property by the S corporation as a taxable transaction.

Profit Distributions

  1. In order to remain an S corporation, the LLC cannot hold ownership in the business. Therefore, if a profit distribution is made to the LLC, the company is no longer eligible to be taxed as an S corporation and may be taxed as a C corporation instead. This means the profit distribution, whether it is made in cash or property, is taxed as a dividend. In this case, the distribution is no longer tax-free, but it's the LLC shareholder that pays the tax.