Conversions of SMLLCs to LLCs and vice versa.

• Jurisdiction: United States
• Author: Lenz, Thomas C.
• Date: 01 April 1999

In January 1999, the IRS issued Rev. Ruls. 99-5 and 99-6, outlining the Federal income tax consequences of partnership entity reclassifications: Rev. Rul. 99-5 explains the results when a single-member limited liability company (SMLLC) becomes a two-member entity; Rev. Rul. 99-6 explains the consequences if one person purchases all the ownership interests in a limited liability company (LLC) classified as a partnership. Among other things, the rulings demonstrate how different tax consequences may result, depending on how transactions are structured.

New Member Purchased Part of SMLLC Interest

Rev. Rul. 99-5 describes what happens when a new member purchases a 50% ownership interest from an SMLLC. The new member is treated as purchasing 50% of the LLC's assets directly from the existing owner, followed immediately by a contribution of assets to a new partnership in exchange for ownership interests in that partnership.

The selling member will have gain or...