As 2018 approaches, year-end projects emerge relating to the termination, formation and conversion of business entities prior to December 31, 2017. People may be stuck in a business they want out of, whether with family, friends, or you took a flyer with an investment opportunity that isn’t working out the way you thought. You may seek to terminate zombie companies, others are inspired by bright new ideas or acquisition 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 always important: any unnecessary tax liability.
Here are some items to take into consideration
Some 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. There can be issues with holding shares of stock, and capital gains taxes – all of which may apply that impact your tax liability and warrant termination of the venture.
Knowing when to form an entity is based on decisions that are fact specific. If you seek to form a new company in this last fiscal quarter of the year, you may want to check with an attorney to find out whether you truly need an entity here and now. Many people 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. Lawyers tend to 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.
As always, it is good to consult with an attorney to find out more details about the risks associated with taking one of these actions of fundamental corporate change.