Conversion of corporation to LLC raises EIN retention questions.

• Author: Douds, Jared
• Position: Limited liability company, employer identification number

The limited liability company (LLC) has become an important component of federal and state tax planning for many U.S. companies. Converting a state law corporation to an LLC may cause losses that are locked up in the corporation to become available as an offset to other income once the LLC is classified as a disregarded entity for federal tax purposes. Disregarded entity status may also simplify the federal tax filings of the ultimate owner.

Most companies that convert a corporation to an LLC want the LLC to retain the historic employer identification number (EIN) of the corporation and may assume that the EIN carries over automatically to the LLC. In fact, the IRS will reassign the historic EIN of a corporation to a successor LLC only in certain situations.

A company that is considering converting a corporate subsidiary to an LLC should determine whether the EIN will be reassigned to the LLC before filing any state conversion document. If the historic EIN of the predecessor corporation has been used on federal and state employment tax returns and to obtain state licenses and registrations, the economic cost of having to obtain a new EIN for the LLC could be substantial. For example, a company's payroll service may have to implement new databases for entities with new EINs, which can be time consuming and costly. Further, for an entity that receives state Medicare and Medicaid reimbursements, any interruption of an EIN can cause significant delays in receiving these reimbursements.

Background

A wholly owned LLC that is classified as a disregarded entity avoids an entity-level income tax but is treated as a corporation for purposes of employment tax and excise tax filings. Regs. Secs. 301.7701-2(c)(2)(iv) and (v) provide that a single-member LLC classified as a disregarded entity is not disregarded for purposes of such filings. Thus, if an LLC has employees or is liable for excise tax, the LLC must have its own EIN for filing Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, 941, Employer's Quarterly Federal Tax Return, and 720, Quarterly Federal Excise Tax Return.

A state law corporation that has a history of filing federal tax payments and returns under a specific EIN most likely will want to retain that EIN when converting to an LLC, regardless of whether the LLC is classified as a disregarded entity, a partnership, or an association taxable as a corporation. The check-the-box regulations found at Regs. Secs. 301.7701-1...