S-Corp Conversion to LLC Help

[Matt Walden]

When I first started out about 15 years ago my business partner put two properties into an S Corp. The two properties are owned outright no debt. My question is how can I convert this into an LLC? I realize now it never should have been an S Corp but I need to get creative here>

Can I simply sell to a  new entity? Should I mortgage to the maximum and then transfer to a new entity? Any advice is welcome.

The S Corp is a Delaware Entity

The properties are in Florida and Minnesota

[John Woodrich]

Unfortunately you are probably stuck with the bad planning. The only way to remove the property from the S-Corp would be to take a distribution which would essentially sell it to yourself at FMV. Not a good result.

Trying to convert your legal entity to an LLC would not have any effect if it is even allowed in DE. You are still stuck with your tax problem of filing returns as an S-Corporation. Changing your entity would not avoid the problem you currently have.

LLCs can elect different tax treatment but your only options as a corporation are regular C-Corp tax rates or the S-Corp tax structure.  You could try to revoke your S-election but that would be a horrible idea.

Someone may try to recommend contributing your shares to an LLC however a LLC (filing as a partnership) is not a permissible S-Corporation shareholder.

Setting up your entity correctly in the beginning was really the only way of avoiding this problem.  I presume you want to leverage up but you won't have any basis for distributions.  You can continue to use the S-Corp and take on debt but you can't take a distribution without reporting a gain if you run out of basis.