Dividing an LLC.

• Author: Hunley, Shaun M.

Regs. Sec. 1.708-1(d) provides the federal income tax rules that apply to the division of a limited liability company (LLC) classified as a partnership. To understand this regulation, one must first understand the terminology it uses.

Prior LLC: A prior LLC is one that exists under applicable jurisdictional law that is subsequently divided into two or more LLCs (Regs. Sec. 1.708-1(d)(4)(ii)).

Resulting LLC: A resulting LLC is one that (1) results from the division of a prior LLC and exists under applicable jurisdictional law after the division and (2) has at least two members that were members in the prior LLC. In other words, a resulting LLC is a post-division LLC that results from the division (Regs. Sec. 1.708-1(d)(4)(iv)).

Continuing LLC: A continuing LLC is a resulting LLC in which the members owned more than 50% of the capital and profits interests of the prior LLC. There can potentially be several continuing LLCs. For example, if the prior LLC divides into two new LLCs and both have exactly the same members as the prior LLC, there are two continuing LLCs. Note that a continuing LLC will not necessarily meet the definition (below) of a divided LLC. It is also possible that none of the resulting LLCs will qualify as a continuing LLC if none of the resulting LLCs have members that owned more than 50% of the capital and profits of the prior LLC (Regs. Sec. 1.708-1(d)(1)).

Note: Any resulting LLC that does not meet the definition of a continuing LLC is treated as a new LLC for federal income tax purposes. As such, it must obtain a new taxpayer identification number (TIN), establish its own tax year, select its own accounting methods, and make its own tax elections.

If an LLC division is undertaken simply to place assets into separate legal entities, and the members' interests in the recipient LLCs are identical to their interests in the prior LLC, each of the recipient LLCs is considered a continuation of the prior LLC (see IRS Letter Ruling 8605047).

Example: The members of M LLC, a medical practice, decide to divide into two LLCs--one to continue its family medical practice ("new" M LLC) and the other to continue the radiology practice (TV LLC). M and N are both classified as partnerships for federal taxes. The ownership of the LLC's capital and profits interests before and after the division is as shown in the table, "Determining Which LLC Continues for Tax Purposes." The new M is deemed a continuation of the old M LLC (the prior LLC)...