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Pitfalls of Converting an Existing Business Into an LLC

Learn about common pitfalls of converting an existing business into a limited liability company (LLC). Avoiding these problems will ensure a smooth transition for your company.


There are two common situations where unintentional errors may occur:

  • When an existing business, such as a corporation, is converted into an LLC there may be tax implications, such as:
    • The conversion may result in a taxable gain;
    • Employment tax wage bases may be affected.
  • Special rules may apply when the LLC has an operating loss:
    • The amount of loss a member can deduct may be limited because of the member’s limited liability for LLC debts. (IRC Sec 465)
    • Passive Activity Loss limitation may restrict the amount of loss a member can deduct. (IRC Sec 469)

This chapter does not deal with the complicated issues related to business entity conversions and practitioners are advised to carefully review the laws and procedures relating to entity conversions.

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