Now You See it, Now You Don’t: The Comings and Goings of Disregarded Entities

The Tax Lawyer, Vol. 65, Winter 2012

50 Pages Posted: 10 Oct 2011 Last revised: 21 Sep 2015

Martin J. McMahon, Jr.

University of Florida - Levin College of Law

Date Written: October 10, 2011

Abstract

While state law recognizes an LLC as a distinct type of entity, an LLC is not a distinct entity for federal tax purposes. An LLC that has two or more owners is treated as either a corporation or a partnership, while an LLC with a single owner will be disregarded for federal income tax purposes unless it elects to be treated as a corporation. In addition to single-member LLCs, the Code and Regulations recognize a second type of disregarded entity – the qualified subchapter S subsidiary (commonly called a QSub). The first part of this Article examines the tax consequences of (1) the formation and dissolution of single member LLCs, (2) check-the-box elections and revocations for a single member LLC, (3) the addition of a second member to an LLC, which converts a disregarded entity into a partnership, (4) the reduction of the number of members of an LLC from two or more to one, which converts the LLC from a partnership into a disregarded entity, (5) the election by a LLC to be taxed as a corporation – including “check and sell” and “check and merge” transactions – and the revocation of an election by an LLC to be taxed as a corporation, (6) the merger of a single member LLC into another LLC or a partnership, and (7) the merger of an LLC into a corporation. The second part of the Article examines the treatment of QSub elections, revocations, and terminations, in various contexts, including merger and acquisition transactions.

Suggested Citation

McMahon, Jr., Martin J., Now You See it, Now You Don’t: The Comings and Goings of Disregarded Entities (October 10, 2011). The Tax Lawyer, Vol. 65, Winter 2012. Available at SSRN: https://ssrn.com/abstract=1941913

Martin James McMahon, Jr. (Contact Author)

University of Florida - Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States
352-273-0931 (Phone)
352-392-7647 (Fax)

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