Can Single Member LLC Owning S-Corp Stock Be Converted To An Asset-Protected Limited Partnership?
Many single member LLCs have been established to own stock in subchapter S corporations as part of asset protection planning. Before the LLC became the most popular business entity attorneys and accountants typically advised clients to operate a business as a sub-S corporation. As the asset protection benefits of the LLC became better known, the sub-s owner wanted to change his business ownership from a corporation to an LLC. The problem was that there are often tax problems, and also legal restrictions in some professional businesses, associated with converting an s-corp to an LLC.
The solution was to set us a single member LLC and transfer the s-corp shares to the single member LLC. This plan provided better asset protection subject to uncertainty about application of asset protection benefits to a single member LLC. Now that the Olmstead decision has undermined the asset protection benefits of multi-member as well as single member Florida LLCs, people with s-corp shares in a single member LLC are looking for asset protection solutions.
A well-known tax attorney from south Florida asked me whether I thought it possible to create a limited partnership which could elect to be taxes as an s-corporation and then transfer s-corporation stock from an existing LLC to the newly formed partnership. IRS rules prohibit S-corp shares from being owned by an entity taxed as a partnership, but a partnership electing taxation as an s-corp could possibly own the s-corp shares that were previously assigned to a single member LLC for asset protection.
The issue with this solution is whether a limited partnership could qualify to be taxed as an s-corp. IRS rules prohibit an s-corp from having more than one class of shareholder (not counting distinctions between voting and non-voting shares). If the general partnership and limited partnership interests are considered different ownership interests then a limited partnership cannot be taxed as an s-corp because it would consist of more than one class of ownership.
The answer is that there is no answer. In January, 2010, the IRS issued a Revenue Procedure bulletin stating in part that the IRS will not answer the question. The IRS said it will not issues rulings as to whether a state law partnership electing to be taxed as a corporation has more than one class of ownership for purposes of qualifying as a sub-s corporation. 26 CFR 601.201. Therefore, converting a single member LLC with s-corp shares to a limited partnership taxed as an s-corp is not a reliable asset protection alternative.
I thought Olmstead only affected single member LLC's?