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. Furthermore, for an entity that receives state Medicare and Medicaid reimbursements, any interruption of an EIN can cause significant delays in receiving these reimbursements.
CONVERTING A STATE LAW CORPORATION TO AN LLC
An LLC is formed under state law, and the IRS looks to what has happened under state law in determining whether it may reassign the historic EIN of a corporation to a newly formed LLC. The IRS draws a distinction between a state law conversion of a corporation to an LLC and a state law merger of a corporation with an LLC with the LLC surviving.
A conversion is a mere change in the legal status of a business, while a merger is the joining of two separate legal entities. The IRS ordinarily will reassign the EIN of a corporation to a successor LLC if the corporation converted to an LLC under state law, but the steps involved vary based on local law.
A tax adviser should not assume that the state filings are the same, for example, for a Delaware conversion and a California conversion. Furthermore, in those states that do not have a conversion statute, converting a corporation to an LLC is not an option.
Companies ordinarily give much attention to the various steps involved in reorganizing a corporate structure. That attention should include a thoughtful analysis of what will happen to the historic EIN of a corporation that is to be converted to an LLC.
For a detailed discussion of the issues in this area, see “Conversion of Corporation to LLC Raises EIN Retention Questions,” by Jared Douds, CPA, and Kevin Curran, J.D., LL.M., in the July 2010 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following subjects in the July 2010 issue of The Tax Adviser:
An analysis of S corporation at-risk rules.
A discussion of gift tax return mistakes.
A look at education tax benefits.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.
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