How do I change ownership of an LLC and the way taxed

General Real Estate Investing
1

I currently have an S-Corp. which owns 99% of an LLC (which owns the property), and I own 1% of the LLC. First, this was set up incorrectly by the person doing this for me as the S-corp should actually own 1% of the LLC. I was trying to do too much at once having the S-corp own the LLC (taxed as a partnership) and act as a management corp. I didn’t realize that one corporation doesn’t have to own the other in order for it to act as the manager and also didn’t need to have a management company so soon for only 2 properties. I am also paying unnecessary multiple tax returns by having the LLC partnership.

Now, I am trying to correct things as much as possible by taking the LLC out of ownership of the S-corp and myself and make it a disregarded single-member entity so that it is recorded on Schedule E of my tax return. How do I change ownership and taxation?

Regarding the S-corp., I don’t want to spend the money dissolving it as it may be of some use later as I grow. I want to put it to some kind of use while paying annual fees and taxes by having it act as the managing company. How do I include this in the LLC’s operating agreement? What is usually a reasonable mgmt. fee?

My plan is buying pre-con/pre-dev. properties and holding 2-3 years. I also may run into property that I may sell in less than a year along the way in which case I may place under the S-corp for flipping purposes.

Please feel free to correct me on misuse of any terms and confirm this plan is optimal regarding my situation.

I appreciate your patience and am trying to answer other questions on this post as best as I can as I learn so I can get the same help in return.

2

making sure I understand:

the LLC is already funded and owns property?

the 1% member wants to take over or buy out the 99% member?

the 1% member also owns 100% of the 99% member?

3

Mcwagner,
Yes, that is all correct. I also forgot to ask if the LLC would be eligible for all of the tax deductions in regards to losses that it takes if set up as described above. Thanks.

4

I don’t have any answers, just another question.

Couldn’t the S-corp act as a property manager for the LLC without being a member or even a non-member manager of the LLC. In other words, why couldn’t the LLC outsource property management to the S-corp?

I personally would not go this route because, by paying the S-corp a management fee, you would be converting passive income to the LLC to active income to the S-corp – resulting in a higher tax bill after the self-employment income tax is factored in. That said, you may have some compelling business reasons to go down this path that we are not aware of.

5

Dave T,
I am not generating any income at this time on this property under the LLC. I am also about to acquire another property which will also not be generating any income, only losses until I sell them in 2-3 years. I can just leave the S-corp completely out of the picture for now if you think that is the best route.

6

I am not an attorney. Perhaps your attorney has some rationale for keeping the S-corp in the loop.

I am only saying that I would not have a separate S-corp I owned manage my own properties because of the negative tax impact.

7

your operating agreement should specify the mechanism for a member to “buy out” another member’s share. If you have one, follow it.

There should be no problem with the 1% member buying the membership interest of the 99% member. It’s not a distribution or dissolution. Other than the sales price, no taxable event is triggered.

You will need to apply for a new tax ID number for the disregarded entity now that it has only one member. And file a “final” return for the partnership, even if it’s zero.