Transitioning from an LLC to a C Corp

My question involves business law in the state of: AL

Hi, first post in this forum.

My business partner and I own 3 Fedex routes in NE Alabama in an LLC. We have been running alone fine, but late last month received notice from Fedex that they will no longer contract with LLC's. We must incorporate for our contract to be renewed, and they are giving us a number of months to do this.

My question: we need to understand the tax implications of two options:
1 - forming a C Corp, transferring the assets, and terminating the LLC
2 - forming a C corp to run the organization, leaving the assets in the LLC, and have the C corp pay for use of the assets.

I'm assuming there IS no simple answer. If there are any tax lawyers that would be willing to answer for a fee, let me know...

Not happy about this, but have to move forward...:(:confused:

You really need to sit down with a local tax attorney. I doubt anyone here is an expert in the tax implications of this situation.

You know an LLC is just a partnership with liability protection. A corporation gives you many more options for raising money and the like. You can form the corporation and then take the "s" election option with the IRS and be taxed as the LLC would be. There is no double taxation that way.

There are limitations to a s corp regarding number and type of stockholders, but none of that would seem to be an issue at this point.

Yes, the LLC could lease the assets to the corporation. I assume there probably are significant physical assets such as delivery trucks. However, off hand I do not see any tax advantages to that.

There might be some advantage to the corp if the LLC owned the trucks and one of them got into some horrific accident that was more than the insurance. I would assume you have more than a million, but you never can tell what might happen in an accident with death, death of children, etc.

There are cab companies for instance that have every single cab incorporated as a separate corporation. They are corps always, never LLC's. Not sure the exact reason for that, but it tells you something.

On the other hand, you'd have two sets of books to keep, two sets of meetings to hold, double yearly annual report fees, double accounting costs, etc. The LLC would kind of be a holding company.

You really need to discuss this all with an experienced business tax attorney.

I suggest working with your accountant on this one. My inclination, based upon the limited information available, would be to create a new corporation for the new contract and to dissolve the LLC. If assets need to be transferred between the entities, your accountant can help you avoid any tax consequences. If you're not already an employee of your LLC, your accountant can also help you set yourself up as an employee and make sure that you're properly set up for tax withholding, worker's comp and unemployment withholding, etc.

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Quoting dcotejr

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My question involves business law in the state of: AL

Hi, first post in this forum.

My business partner and I own 3 Fedex routes in NE Alabama in an LLC. We have been running alone fine, but late last month received notice from Fedex that they will no longer contract with LLC's. We must incorporate for our contract to be renewed, and they are giving us a number of months to do this.

My question: we need to understand the tax implications of two options:
1 - forming a C Corp, transferring the assets, and terminating the LLC
2 - forming a C corp to run the organization, leaving the assets in the LLC, and have the C corp pay for use of the assets.

I'm assuming there IS no simple answer. If there are any tax lawyers that would be willing to answer for a fee, let me know...

Not happy about this, but have to move forward...:(:confused:

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I had a situation myself where I had an LLC for one purpose, and a "C Corp" for another. My LLC was the operating arm. The "C Corp" was kind of a management company setup that did the billing.

If I had your kind of situation, I would use the C Corp to bill Fedex, who in turn pays you. Then, the LLC, the operating arm, will bill the C Corp, who would in turn pay the LLC for services rendered.

Because of the double taxation aspect of C Corps, I made it so that the income and the expense (billings from the LLC) is the same, so there is no tax due.

One of the downsides is that you have to have two sets of books, bank accounts, tax returns etc., plus franchise tax issues depending on what state you are in. But it'll give you time to transition if you have payroll services through the LLC, and other bills, contracts with vendors thru the LLC that would be inconvenient to impossible to cancel or changeover in one big swoop.

But the two sets of books was no biggie for me, as it's just an extra entry or two in Quickbooks. I used Capital One for my C Corp basic business checking, and it's $5.00/month basic fee. I had Chase for my LLC who also had my SBA loan. My CPA just adds another $100 to do my extra set of returns, down from $200 a few years earlier. I told him the C Corp return was so simple that I just got the tax software at Staples, export the file from QB. and I'm done, and the software runs me less than $100.00.

As mentioned in the other post, the one who can give you the best advice here is your CPA. It's beyond the scope of this discussion, but there are other advantages to using a tandem setup of two entities, and depending on your tax situation, the CPA can explain to you.

Thanks for the replies.

I have spoken to my accountant, and he said he had never done this type of transition before. He has asked me to speak to local Fedex terminal management to see if the setup with the C corp can be the organization side with the LLC remaining owners of the vehicles.

Again, thank you for your insight!

I can't imagine for the life of my why you'd want to be a C corp. And your question is not simple to answer because you've not stated whether your LLC has been taxed as a partnership or as a corporation up until now. It had the option of electing either. It will be simpler if it was being taxed as a corporation, as the transfer of assets from a partnership (which is what an LLC is by default for tax purporsed) to a corporation can be more complicated with tax consequences. Determining basis can be different between the two, etc. But this is not a matter for an attorney. There are few legal questions involved, mostly just tax questions. You need a tax professional and if you've consulted one that couldn't advise you then you simply didn't find a person with the competence you need in this area. Far more here than a message board can advise on.

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Quoting dcotejr

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Thanks for the replies.

I have spoken to my accountant, and he said he had never done this type of transition before. He has asked me to speak to local Fedex terminal management to see if the setup with the C corp can be the organization side with the LLC remaining owners of the vehicles.

Again, thank you for your insight!

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A few more thoughts.

Just to add that if you form a new corp, where I am, I have to start all over paying the highest workman's comp rates, unemployment insurance rates, compared to another entity that has good rating experience going back. The same with bank references going back some years compared to starting new.

As to your vehicles, aside from business tax issues, in my state, just transferring the title means I'm stuck paying a sales tax on the value of the vehicles.

I agree with your CPA, find out if the only requirement is that they sign a contract with a "C Corp", and behind the scenes, you might still want to operate the LLC, till such time you feel you don't need it any more. Keep in mind a C Corp is a totally different animal compared to an LLC taxed as a partnership if you chose that option, and the taxation issues for a C Corp may not be all to your liking.

However, I got into a small problem with my C Corp. As I mentioned, I used it as a flow through billing entity, and for quite a while, I did not use a CPA because I had a problem with paying full fees for yet another company, so one year I got a letter from the state imposing a penalty because it did not have a minimum asset value of $1,000 as required under state law. I've been using Turbo Tax, and this was never flagged it as an error, though it filled in all the Federal, State, and local tax forms properly. As suggested by the state auditor, I amended the return to add $1,000 in assets, and had the penalty waived.

I'm pointing out here that added complexities presents added issues.

I believe the OP indicates that FedEx only requires contracting with a corporation. Whether a corporation is a C or S corp is of no consequence to a counterparty on a contract. It is a taxation issue only. FedEx would have no interest in the tax status of the corporation so there is no advantage to a C corp that I can identify.

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Quoting Bubba Jimmy

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I believe the OP indicates that FedEx only requires contracting with a corporation. Whether a corporation is a C or S corp is of no consequence to a counterparty on a contract. It is a taxation issue only. FedEx would have no interest in the tax status of the corporation so there is no advantage to a C corp that I can identify.

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I agree. I was thinking that too, and couldn't understand why the mention of "C Corp" requirement if there in fact is one. On the other hand, I figure his CPA should have looked into this issue and commented on it by now.

Thanks for the further info.

In speaking with my CPA, he said that any advantage an S corp has will be disappearing, and that a C corp is simpler to administer. The taxation issue will be a moot point, as we can pay out any 'profit' as bonuses at the end of the year...