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
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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
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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.
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Writer Bio
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.