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CASE STUDY

Dividing an LLC

Editor: Regs. Sec. 1.708-1(d) provides
Shaun M. Hunley, J.D., LL.M. the federal income tax rules that A divided LLC
apply to the division of a limited
liability company (LLC) classified is a continuing LLC
as a partnership. To understand this that is treated for
regulation, one must first understand federal income tax
the terminology it uses.
Prior LLC: A prior LLC is purposes as
one that exists under applicable a continuation of
jurisdictional law that is subsequently
divided into two or more LLCs (Regs. the prior LLC.
The form of an LLC Sec. 1.708-1(d)(4)(ii)).
division determines Resulting LLC: A resulting
the tax treatment of LLC is one that (1) results from the that owned more than 50% of the capi-
division of a prior LLC and exists
tal and profits of the prior LLC (Regs.
any resulting LLCs. under applicable jurisdictional law Sec. 1.708-1(d)(1)).
after the division and (2) has at least Note: Any resulting LLC that
two members that were members does not meet the definition of a
in the prior LLC. In other words, a continuing LLC is treated as a new
resulting LLC is a post-division LLC LLC for federal income tax purposes.
that results from the division (Regs. As such, it must obtain a new taxpayer
Sec. 1.708-1(d)(4)(iv)). identification number (TIN), establish
Continuing LLC: A continuing its own tax year, select its own ac-
LLC is a resulting LLC in which the counting methods, and make its own
members owned more than 50% of tax elections.
the capital and profits interests of If an LLC division is undertaken
the prior LLC. There can potentially simply to place assets into separate legal
be several continuing LLCs. For entities, and the members’ interests
example, if the prior LLC divides into in the recipient LLCs are identical to
two new LLCs and both have exactly their interests in the prior LLC, each
the same members as the prior LLC, of the recipient LLCs is considered a
there are two continuing LLCs. Note continuation of the prior LLC (see IRS
that a continuing LLC will not neces- Letter Ruling 8605047). PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted from sarily meet the definition (below)
Checkpoint Tax Planning and Advisory of a divided LLC. It is also possible Example: The members of M LLC,
Guide’s Limited Liability Companies
topic. Published by Thomson Reuters, that none of the resulting LLCs will a medical practice, decide to divide
Carrollton, Texas, 2023 (800-431-9025; qualify as a continuing LLC if none into two LLCs — one to continue
tax.thomsonreuters.com). of the resulting LLCs have members its family medical practice (“new” M

50 February 2023 The Tax Adviser