As 2018 approaches, year-end projects emerge relating to the termination, formation and conversion of business entities prior to December 31, 2017. Some clients may seek to terminate zombie companies, others are inspired by bright new ideas or M&A opportunities to form new companies, and a smaller group want to change or convert business entities. Practitioners should be particularly careful with these year-end filings so as to avoid unintended consequences and unnecessary tax liability.
Termination decisions are clearer than others. If a company has outlived its usefulness, dissolve and cancel that company right away to prevent the accrual of state and federal taxes to that entity in the new year.
Formation decisions are fact specific. If a client seeks to form a new company in this last fiscal quarter of the year, review the client’s reasoning for needing an entity here and now. Many clients can wait until January to start doing business, and would be very disappointed if their attorney filed a new company in November or December, incurring tax liability in 2017 with no clear business need. If the business can wait until the new year, file in the new year.
Conversions are more complicated. When a conversion is completed, such as a corporation being converted into a LLC, the disappearing corporation is canceled on the date of filing while the surviving LLC is formed as of the following day. Thus, it is difficult to convert an entity without triggering a tax year (and associated tax liability) for the new, surviving LLC in the current year, resulting in both entities being taxed. Careful practitioners will file the conversion on the last business day of the year causing the disappearing corporation to be canceled in the current year, and the surviving LLC to be formed on the first business day of the new year. Such a filing schedule should prevent incurring taxes on two entities - the disappearing corporation and surviving LLC - in the same year.
California does apply the “15 Day Rule” which affects business entity filings occurring in the first or last fifteen days of a tax year. (Cal. Rev. & Tax Code Sections 17936, 17946, 17948.2 and 23114). The 15 Day Rule is the subject of another e-bulletin. Spoiler alert: the 15 Day Rule does not apply to conversions.
This e-bulletin was prepared by Holden W. Stein, Esq., of Fathom Law PC, in San Francisco (email@example.com).