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Table of Contents
-
Chapter 1 — Overview - Chapter 2 — Introduction to and Background of Illinois Limited Liability Companies
- Chapter 3 — Organizing an Illinois Limited Liability Company
- I. [3.1] Introduction
-
II. Choice of Entity: Industry, Tax, Liability, Control, and Distribution Issues - [3.2] For-Profit and General Nonprofit Business and Other Organization Types
- [3.3] Types of Business Operation, Industry Norms, and Tax Questions; Comparison Charts
- Federal Tax on Earnings; Miscellaneous Entities
- [3.4] Entities Taxed as Partnerships; LLCs not electing corporation status, LPs, RLLPs
- [3.5] Subchapter S Corporation Income
- [3.6] C Corporation Income
- [3.7] For-Profit or Nonprofit Purposes Permitted for Illinois LLCs
- [3.8] Client Organizational Issues by Size of Business
- [3.9] Securities Registration and Liability
- [3.10] Sole Practitioner of Law
- [3.11] Two Investors
- [3.12] Software Company
- [3.13] Corporate Group
- [3.14] State Tax Planning
- III. Organizational Filings and Forms Needed
- [3.15] Limited Liability Company Organization and Tax Registration
- [3.16] Regulated Entity Compliance Certificates
- Not-for-Profit Organizations
- [3.17] Charitable Trusts Registration and Reporting
- [3.18] Religious Organizations
- [3.19] Tax Exemption
- [3.20] Federal Income Tax Exemption
- [3.21] Religious Organization Exemptions
- [3.22] Political Organization Exemptions
- [3.23] Sales Tax Exemption
- [3.24] Property Tax Exemption
- [3.25] Local Registration and Permits
- IV. For-Profit Entity Tax Incidence
- [3.26] Tax Planning
- [3.27] Federal and State Income Tax
- [3.28] Filings Needed To Obtain Specific Federal Tax Treatments
- Status Available Without Election Filings
- [3.29] Disregarded Entity
- [3.30] Limited Liability Company Taxed as a Partnership
- [3.31] Limited Partnership Limited Liability Company
- [3.32] Entity Status Requiring Election or IRS Qualification Decisions
- [3.33] S Corporation Status
- [3.34] C Corporation Status
- [3.35] Limited Liability Companies Pay No Illinois Franchise Tax
- V. [3.36] Self-Employment Tax
- VI. Liability Limitation
- VII. Control and Management
- VIII. [3.50] Pre-Organization Agreement
- IX. [3.51] Reservation of Name
- X. Articles of Organization
- [3.52] In General
- [3.53] Filing Form LLC-5.5
- [3.54] Question 1 — Limited Liability Company Name
- [3.55] Question 2 — Address of Limited Liability Company’s Principal Place of Business
- [3.56] Question 3 — Date That Articles of Organization Are Effective
- [3.57] Question 4 — Registered Agent’s Name and Registered Office Address
- [3.58] Question 5 — Purposes for Which Limited Liability Company Is Organized
- [3.59] Questions 6 and 7 — Dissolution
- [3.60] Question 8(a) — Management by Managers
- [3.61] Question 8(b) — Management by Members
- [3.62] Question 9 — Affirmation
- [3.63] Other Provisions for Regulation of Internal Affairs of Limited Liability Company
- [3.64] Transacting Business Under Assumed Name
- XI. Tax Registration
- XII. Appendix
- Chapter 4 — Limited Liability Company Operating Agreements
- I. [4.1] General Description and Function
- II. [4.2] Comparison to Partnership Agreements and Corporate Bylaws
- III. [4.3] Mandatory Provisions
- IV. [4.4] Default Rules
- [4.5] Admission of New Members
- [4.6] Right to Information
- [4.7] Management
- [4.8] Standards of Member’s and Manager’s Conduct
- [4.9] Member’s and Manager’s Rights to Payments and Reimbursement
- [4.10] Actions by Members
- [4.11] Member’s Liability for Contributions
- [4.12] Sharing of Profits and Losses
- [4.13] Sharing of Distributions
- [4.14] Timing of Interim Distributions
- [4.15] Dissociation
- [4.16] Member’s Right To Withdraw Voluntarily; Effects of Dissociation
- [4.17] Distributions Following Dissociation
- [4.18] Form of Distributions
- [4.19] Transfer of Interest
- [4.20] Dissolution
- [4.21] Distribution of Assets upon Dissolution
- V. [4.22] Single-Member Operating Agreement Issues
- VI. [4.23] Series Limited Liability Companies
- VII. [4.24] Checklist of Provisions for Operating Agreement
- VIII. Appendix — Sample Forms
- Chapter 5 — Illinois Limited Liability Company Operating and Maintenance Issues
- I. [5.1] Introduction
- II. Management Structure and General Operating Topics
- [5.2] Member-Managed LLC Default Rules
- [5.3] Manager-Managed LLC Default Rules
- [5.4] Modification of the Default Rules
- [5.5] Meeting and Voting Requirements
- [5.6] Officers
- [5.7] Agency Authority and Agent’s Obligations
- [5.8] General Standards of Conduct
- [5.9] Liability of Members and Managers
- [5.10] Theory of Incorporation
- [5.11] Artificial Entity with Liabilities Separate from Those of Owners
- [5.12] Bankruptcy Exception to Asset Protection for Owners of Business Entities
- [5.13] Organization Tax Liabilities May Not Extend to Owners
- [5.14] Environmental Liabilities and Other Regulatory Responsibilities
- [5.15] Disregarding the Entity
- [5.16] Reverse Veil-Piercing
- [5.17] Veil-Piercing Theory and Dominant Lenders
- [5.18] Liability for Board Members or General Partner Directors
- [5.19] Fraudulent Transfer Challenges
- [5.20] Indemnification
- [5.21] Right of Inspection
- [5.22] Single-Member LLCs
- [5.23] Low-Profit LLCs
- [5.24] Dissolution and Winding Up
- III. Election and Compensation of Managers
- IV. Proper Election of Management Structure
- V. [5.29] Secretary of State Information
- Chapter 6 — Liability of Members and Managers in Limited Liability Companies, Including Breach of Fiduciary Duties
- I. [6.1] Scope of Chapter
- II. Sources of Liability
- [6.2] Liability for Personal Conduct
- Liability Predicated on Agency Considerations, Particularly Involving Undisclosed or Partially Disclosed Principals; Promoter’s Liability
- [6.3] Agency Liability
- [6.4] Promoter’s Liability
- [6.5] Liability for Improper Distributions
- [6.6] Liability Arising Out of Dissolution
- III. [6.7] Piercing the Limited Liability Company Veil
- IV. Fiduciary Duties
- [6.8] Fiduciary Duties in General
- [6.9] Limited Liability Company Act Provisions Regarding Fiduciary Duties
- [6.10] Fiduciary Duties Owed to the Limited Liability Company
- [6.11] Ratification
- [6.12] Fiduciary Duties Owed to Members
- [6.13] Fiduciary Duties Owed to Creditors
- [6.14] Oppression
- [6.15] Defining and Limiting Fiduciary Duties
- V. [6.16] Liability Arising from the Securities Laws
- VI. [6.17] Charging Orders Against Members
- VII. [6.18] Derivative Actions
- VIII. [6.19] Special Litigation Committee
- Chapter 7 — Capital Structure and Membership Interests
- I. [7.1] Scope of Chapter
- II. Contributions
- III. Distributions
- [7.5] Agreement as to Allocation
- [7.6] Default Provision
- [7.7] Interim Distributions
- [7.8] Right to Distribution
- [7.9] Distribution in Kind
- Limitations on and Liability for Improper Distributions
- [7.10] Liability
- [7.11] Definition of “Improper Distribution”
- [7.12] Right of Contribution
- [7.13] Statute of Limitations for Liability
- [7.14] Barring Any Known Claims
- IV. Membership Interest
- Chapter 8 — Uses for Limited Liability Companies
- I. [8.1] Introduction
- II. Versatile Entity Form Creates Many Uses
- III. [8.7] Common and Specific Uses for Limited Liability Companies
- [8.8] Liability Protection Generally
- [8.9] Ease of Isolating and Organizing Assets and Operations
- [8.10] High-Risk Businesses
- [8.11] Real Estate
- [8.12] Property Acquisition
- [8.13] Property Management
- Estate Planning
- [8.14] Efficient Method for Operating and Transferring Family Assets
- [8.15] Life Insurance
- [8.16] Joint Business Opportunities
- [8.17] Certifications
- [8.18] General Certification Requirements
- [8.19] Women Business Enterprises
- [8.20] Minority Business Enterprises
- [8.21] Veteran Business Enterprises
- [8.22] Disadvantaged Business Enterprises
- [8.23] Operating Agreement Requirements
- [8.24] Low-Profit Limited Liability Company
- IV. [8.25] Prohibited and Uncertain LLC Uses
- V. [8.31] Conclusion
- Chapter 9 — Working with Limited Liability Companies
- I. [9.1] Scope of Chapter
- II. Conversion of an Existing Entity to a Limited Liability Company
- [9.2] Overview
- Conversion of an Existing Partnership to an LLC
- [9.3] Considerations Under the Limited Liability Company Act
- [9.4] Tax Considerations
- Conversion of an Existing Corporation to an LLC
- [9.5] Considerations Under the Business Corporation Act of 1983
- [9.6] Tax Considerations
- [9.7] Tax Principles of Corporate Liquidation
- [9.8] Consequences of Corporate Liquidation
- [9.9] Liquidation of a C corporation
- [9.10] Liquidation of an S corporation
- [9.11] Special Circumstances
- [9.12] Alternatives to Outright Conversion
- [9.13] Mirror LLC
- Corporate Freeze
- [9.14] Generally
- [9.15] Tax considerations
- [9.16] Special concerns involving an S corporation freeze
- Merger of an Illinois LLC with or into an Existing Entity
- [9.17] Considerations Under the LLCA
- [9.18] Tax Considerations
- III. Bankruptcy Law and Creditors’ Rights Issues
- [9.19] Treatment of an Illinois LLC Under the Federal Bankruptcy Code
- Creditors’ Rights Under the LLCA
- Against an Illinois LLC
- [9.20] Excess Distributions
- [9.21] Claims Against a Dissolved LLC
- [9.22] Against a Judgment Debtor’s Distributional Interest
- [9.23] Continuation of an Illinois LLC Following a Member’s Bankruptcy
- IV. [9.24] Securities Law Issues
- V. Across-State-Border Issues
- VI. Using LLCs for Business Transactions
- LLC Contracts
- [9.32] Standing To Sue
- [9.33] Illinois Jurisdiction by Agreement
- [9.34] Post-Sale Disputes Under Company Asset Purchase Agreements
- [9.35] Warranty and Fraud Claims Against Out-of-State Manufacturer
- LLC Entity Organization for Various Industries and Tax Situations
- [9.36] Organizational Flexibility
- LLC Use for Private Equity Funds
- [9.37] Entities Used
- [9.38] Documentation Needed for Investor Funds-Receiving Entity
- [9.39] Carried Interest Reduces or Eliminates Ordinary Income and Allows Capital-Gains Tax Liability for Fund Managers and Investors
- [9.40] Additional Resource
- [9.41] LLC Use for Private Real Estate Investment
- LLC for Same Uses as a Family Trust or Limited Partnership
- [9.42] Marketability and Control Discounts Reduce Taxable Transfer
- [9.43] Nontax Advantages of Family Business Entities
- Tax Regulations Applicable to LP or LLC Interests Treated as FLPs
- [9.44] Economic substance and compliance with entity filing requirements
- [9.45] Surviving IRS challenges
- [9.46] IRS auditor questions
- [9.47] Special tax benefits for farm LLCs or LPs
- Chapter 10 — Tax Issues
- I. [10.1] Introduction
- II. Federal Income Tax
- [10.2] Partnership Rules
- [10.3] Economic-Substance Doctrine
- [10.4] Investment Company Issues
- [10.5] The 80-Percent Test
- [10.6] The Diversification Test
- [10.7] Allocations of Profits and Losses
- [10.8] Allocations of Debt
- Distributions of Cash and Property
- [10.9] Disguised Partner Sales
- [10.10] Guaranteed Payments
- [10.11] Charitable Contributions
- [10.12] Elections
- [10.13] Mergers and Conversions
- [10.14] Internal Revenue Code §199: Qualified Production Activities Deduction
- [10.15] Partnership Tax Provisions of Troublesome Application to Limited Liability Companies
- [10.16] Application of At-Risk and Passive Loss Rules
- [10.17] Recourse and Nonrecourse Loans
- [10.18] Legal Guidance
- [10.19] Fiscal Year
- [10.20] Method of Accounting
- [10.21] Tax Matters Partner Provisions
- [10.22] Code §108: Cancellation of Indebtedness Income
- III. Illinois State Taxes
- IV. [10.28] Self-Employment and Payroll Taxes
- V. Medicare Taxes
- VI. [10.34] Estate and Gift Taxes
- VII. Comparison of Partnerships with Other Entities
- [10.41] Introduction
- [10.42] Comparison with Limited Partnerships
- [10.43] Limited Liability
- [10.44] Participation in Management
- [10.45] Comparison with S Corporations
- [10.46] Relaxed Ownership Criteria
- [10.47] Advantages of Partnership Taxation
- [10.48] Step-Up in Basis
- [10.49] Code §754 Election
- [10.50] Code §704(b) Special Allocations
- [10.51] Absence of Election
- [10.52] Complexity of S Corporation Tax Laws
- [10.53] S Corporation Built-in Gains Tax
- [10.54] Payroll Tax and Tax on Investment Income
- Comparison with C Corporations
- [10.55] Entity Level
- Owner Level
- [10.56] Owner-Employees of C Corporations
- [10.57] Employer-Provided Health Insurance
- [10.58] Section 1202
- [10.59] Effective Tax Rates
- Chapter 11 — Limited Liability Partnerships
- I. Introduction
- II. Formation of a Limited Liability Partnership
- [11.3] General Partnership Must Register as an LLP
- [11.4] Name of the LLP
- [11.5] Registration as an LLP
- [11.6] Form of the Statement of Qualification
- [11.7] Content of the Statement of Qualification
- [11.8] Execution of the Statement of Qualification
- [11.9] Filing the Statement of Qualification
- [11.10] Fees for Filing the Statement of Qualification
- [11.11] Amendments and Corrections to the Statement of Qualification
- III. Operation and Termination
- IV. [11.15] Partnership Income Tax Treatment
- V. Scope and Effect of Liability Limitations
- VI. Litigation Concerns
- VII. [11.21] LLPs in Bankruptcy
- VIII. LLP Usage
- IX. [11.25] Foreign LLPs
- X. [11.32] Illinois LLP Status in Foreign Jurisdictions
- XI. [11.33] Conclusion
- Chapter 12 — Series Limited Liability Companies
- I. [12.1] Introduction
- II. [12.2] Illinois Statute Permitting Series Limited Liability Companies
- III. [12.3] Membership
- IV. [12.4] Sample Uses of a Series LLC
- V. [12.5] Securities Law Considerations
- VI. [12.6] Partnership Tax Treatment
- VII. [12.7] Risks and Questions
- VIII. [12.8] Conclusion
- IX. [12.9] Sample Separate Series Agreement
- Chapter 13 — Insolvency Implications for the Limited Liability Company and Its Members
- I. [13.1] Scope of the Chapter
- II. [13.2] The Standards of Insolvency
- III. [13.6] The Insolvent Limited Liability Company
- [13.7] Corporate Governance — Whose Business Is It Anyway?
- [13.8] Key Considerations for Scrutiny Pursuant to the UFTA
- [13.9] Distributions to Members of an Insolvent LLC
- [13.10] Expansion of Fiduciary Duties To Include the Rights of Creditors
- [13.11] Standards for Traditional Fiduciary Duties Under Illinois Law
- [13.12] Particular Duties
- [13.13] Manager-Managed LLC
- [13.14] Fiduciary Duties in the Context of an Insolvent LLC
- [13.15] Illinois Law
- [13.16] Delaware Law
- [13.17] Derivative Standing
- [13.18] Illinois Law
- [13.19] Delaware Law
- Separateness of an Insolvent LLC: Alter-Ego and Veil-Piercing Claims
- [13.20] Illinois Law
- [13.21] Delaware Law
- IV. [13.22] The Insolvent LLC Member
- V. [13.25] Out-of-Court Workout or Dissolution of the Insolvent LLC
- VI. [13.29] The LLC and Its Members and Managers in Bankruptcy
- Initial Considerations for an Insolvent Debtor
- [13.30] General Framework of the Bankruptcy Code
- [13.31] Alternative Bankruptcy Chapters
- [13.32] Avoidance Powers
- [13.33] Limits on an LLC’s Eligibility To Proceed Under Certain Chapters of the Bankruptcy Code
- [13.34] The Dissolved LLC as a Debtor
- [13.35] The LLC Chapter 11 Debtor
- [13.36] Authority To File Bankruptcy
- [13.37] Consent for Filing Required Under the LLCA
- [13.38] Filing Limitations Contained in the Operating Agreement
- [13.39] Impact of Bankruptcy of the Manager-Member
- [13.40] The Single Asset Real Estate Entity
- [13.41] Designation as a Single Asset Real Estate
- [13.42] Ramifications of a Single Asset Real Estate Designation
- [13.43] The Small Business LLC Debtor
- [13.44] Qualifications for a Small Business Debtor
- [13.45] Ramifications of Being a Small Business Debtor
- [13.46] Fiduciary Duties of the Manager for the LLC Debtor-in-Possession
- [13.47] General Duties in Chapter 11
- [13.48] The Protections of Notice to Creditors and Court Approval
- [13.49] Statutory Remedies for the Breach of Fiduciary Duties in Bankruptcy
- [13.50] Enforceability of the Operating Agreement in Chapter 11
- [13.51] The Operating Agreement as an Executory Contract
- [13.52] Ipso Facto Clauses
- [13.53] Anti-Assignment Clauses
- The LLC Debtor’s Interests — Property of the Estate and the Automatic Stay
- [13.54] Statutory Framework
- [13.55] Property of the Dissolved LLC Debtor
- [13.56] The LLC Debtor’s Interests in Causes of Action
- [13.57] Derivative Actions
- [13.58] Assets of Nondebtor Entities — Substantive Consolidation
- [13.59] The Completion of the Bankruptcy Process — Confirmation of a Chapter 11 Plan
- [13.60] The Statutory Framework for Confirmation of a Chapter 11 Plan
- [13.61] The Terms of the Chapter 11 Plan
- [13.62] Statutory Minimum Requirements
- [13.63] Plan Term Issues Particularly Relevant to an LLC Debtor
- [13.64] Retention of Membership Interests — The Absolute-Priority Rule
- VII. [13.65] Bankruptcy of an Individual Member
- [13.66] The Member-Debtor’s Membership Interest as Property of the Bankruptcy Estate
- [13.67] Distributional Interests
- [13.68] Noneconomic Interests
- [13.69] Rights as Manager
- [13.70] Impact of Dissociation on Debtor’s Interest
- [13.71] The Membership Interest as Estate Property — Now What?
- [13.72] Nondischargeability of a Member’s Indebtedness
- VIII. [13.73] Conclusion
- Chapter 14 — Considerations in Electing S Corporation Status
- I. General Principles in Selecting the Proper Form of Business Organization
- II. Nontax Considerations in Selecting a Form of Business Organization
- III. [14.11] Basic Tax Characteristics
- [14.12] Proprietorships and Single-Member Limited Liability Companies
- [14.13] Partnerships and LLCs with More than One Member
- C Corporations
- [14.14] Double Tax
- [14.15] Reducing the Impact of the Double Tax: Opportunities and Restrictions
- [14.16] Retirement Income and Fringe Benefits for Shareholder-Employees
- [14.17] Tax-Qualified Retirement Plans
- [14.18] Medical Benefits
- [14.19] Group Term Life Insurance
- [14.20] Employee Stock Plans
- S Corporations
- [14.21] Eligibility, Election, Operational, and Termination Rules Governing S Corporations
- [14.22] No More than 100 Shareholders
- [14.23] Only Qualified Shareholders
- [14.24] One Class of Stock
- [14.25] Shareholder Consent
- [14.26] Qualified Entities
- [14.27] Limitation of Passive Income
- [14.28] Tax on Built-In Gains
- [14.29] Treatment of S Corporation Income and Losses to Shareholders Generally
- [14.30] Treatment of Corporate Distributions to Shareholders Generally
- [14.31] Issues Affecting Exit Strategy
- IV. Using the Subchapter S Election or an LLC as a Tax-Saving Device
- [14.32] Pass-Through of Losses
- [14.33] Capital Gain Conversion Potential
- [14.34] Retirement Income and Fringe Benefits for Owner-Shareholders
- [14.35] Accounting Methods
- [14.36] First-Level Tax Savings
- [14.37] Eliminating the Second Tax on Dividend Distributions
- [14.38] Sale or Liquidation of the Business
- [14.39] Elimination of Accumulated-Earnings Problems
- [14.40] Maximizing Investment Return on Corporate Earnings
- [14.41] Elimination of Unreasonable Compensation Issue
- [14.42] Income Splitting
- [14.43] Income Deferral in Year of Election if Corporation Has a Fiscal Tax Year
- V. Conclusion
- Chapter 15 — Electing S Corporation Status
- I. [15.1] Introduction
- II. Requirements To Elect S Status
- [15.2] In General
- [15.3] Domestic Corporation
- [15.4] Ineligible Corporations
- [15.5] No More than 100 Shareholders
- [15.6] Spouses
- [15.7] Family Members
- Shareholders Must Be Individuals, Estates, Certain Trusts, Tax-Exempt Charitable Organizations, or Qualified Retirement Plans
- [15.8] Individuals
- [15.9] Estates and Testamentary Trusts
- [15.10] Grantor Trusts
- [15.11] Voting Trusts
- [15.12] Qualified Subchapter S Trusts
- [15.13] Requirements To Be a QSST
- [15.14] The QSST Election
- [15.15] Electing Small Business Trusts
- [15.16] Election Process
- [15.17] Conversion to QSST
- [15.18] Termination of ESBT
- [15.19] ESBT as Shareholder and Taxes Imposed
- [15.20] Individual Retirement Accounts Owning Stock in a Bank
- [15.21] Tax-Exempt Organizations
- [15.22] Qualified Retirement Plans
- [15.23] Shareholder May Not Be a Nonresident Alien
- [15.24] No More than One Class of Stock
- [15.25] Buy-Sell and Redemption Agreements
- [15.26] Obligations Designated as Debt
- [15.27] Call Options, Warrants, and Similar Instruments
- [15.28] Straight Debt Safe Harbor
- [15.29] Qualified Subchapter S Subsidiaries
- [15.30] The Election
- [15.31] Late QSub Election
- [15.32] Termination of QSub Election
- Maintaining the Subchapter S Election
- [15.33] Inadvertent Terminations
- [15.34] Election After Termination
- III. The Process of Electing S Status
- IV. Termination of S Election
- [15.43] In General
- [15.44] Revocation of the S Election
- [15.45] Termination by Ceasing To Be a Small Business Corporation
- [15.46] Termination Due to Excess Passive Income
- [15.47] S Termination Year
- [15.48] Other Consequences of S Termination Year
- [15.49] Inadvertent Terminations
- [15.50] Election After Termination
- V. Organizing and Capitalizing the S Corporation
- [15.51] In General
- Selecting Classes of Common Stock
- [15.52] Corporate Factors
- [15.53] Tax Factors
- The Debt-Equity Mix
- [15.54] In General
- [15.55] Comparison of Debt and Equity in an S Corporation
- Transferring Property to the Corporation
- [15.56] Nonrecognition of Gain
- [15.57] Receipt of Boot
- [15.58] Basis for Stock
- [15.59] Assumption of Liabilities
- [15.60] LIFO Recapture
- Selection of a Fiscal Year
- [15.61] Permitted Taxable Year
- [15.62] Code §444 Election
- [15.63] Code §7519 Payments
- [15.64] Comprehensive Example
- [15.65] Selection of Accounting Method
- [15.66] Shareholders’ Agreements
- VI. Appendix — Forms
- Chapter 16 — Operating and Maintaining the S Corporation
- I. [16.1] Scope of Chapter
- II. Tax Consequences at the Corporate Level
- [16.2] Effect of Election
- [16.3] Computation of Taxable Income
- [16.4] Elections of the S Corporation
- [16.5] Expenses Owed to Shareholders and Related Taxpayers
- [16.6] Earnings and Profits of S Corporations
- [16.7] Distributions of Appreciated Property
- [16.8] No Investment Tax Credit Recapture on Election
- [16.9] Carryforwards and Carrybacks
- [16.10] S Corporation as Shareholder of Regular Corporations
- [16.11] Certain Taxes Imposed at the Corporate Level
- [16.12] Passive Investment Income Rule and the “Sting” Tax
- [16.13] Corporations without accumulated earnings and profits
- [16.14] Corporations with accumulated earnings and profits
- [16.15] Tax Imposed by Internal Revenue Code §1374
- [16.16] Last-in, First-Out Recapture Tax
- [16.17] Information Returns and Tax Audits
- III. The S Corporation as a Conduit — Tax Consequences at the Shareholder Level
- [16.18] Conduit Aspects
- The Taxation Scheme of Subchapter S
- [16.19] Determination, Characterization, and Allocation of Shareholder Tax Items
- [16.20] “Taken into Account” and “Pro Rata Share”
- [16.21] The Mechanism for Passing Through the Character of Tax Items
- [16.22] Adjustments to Basis of Stock and Loans from Shareholders
- [16.23] Stock Basis Rules
- [16.24] Indebtedness Basis Rules
- [16.25] Deductibility of Deductions and Losses by Shareholder
- [16.26] Treatment of Distributions
- [16.27] Corporations Without Accumulated Earnings and Profits
- [16.28] Corporations with Accumulated Earnings and Profits
- [16.29] Elections Relating to the Source of Distributions
- [16.30] In-Kind Distributions
- IV. [16.31] Maximizing Use of Deductions and Losses
- V. [16.37] Distribution Planning
- VI. [16.40] Changes in Ownership
- VII. [16.44] Reorganizations Involving S Corporations
- VIII. [16.51] Compensating Employees of S Corporations
- IX. [16.54] Qualified Subchapter S Subsidiaries
- X. [16.55] Conclusion
- Chapter 17 — Termination of the S Corporation Election
- I. [17.1] Introduction
- II. [17.2] Considerations Involved in Decision To Terminate S Corporation Election
- III. Voluntary Revocation by the Corporation
- IV. Revocation Through Intentional or Inadvertent Termination
- [17.5] Intentional Termination
- [17.6] Causes of Termination
- [17.7] Acquisition of Stock Interest by Prohibited Shareholders
- [17.8] More than One Class of Stock
- [17.9] General Rules
- [17.10] Buy-Sell and Redemption Agreements
- [17.11] Distributions Based on Varying Interest in Stock During Taxable Year
- [17.12] Debt as Second Class of Stock
- [17.13] Options, Warrants, and Convertible Notes
- [17.14] Restricted Bank Director Shares
- [17.15] More than 100 Shareholders
- [17.16] Membership in an Affiliated Group Not Terminating Event
- [17.17] Excessive Passive Investment Income
- [17.18] Other Requirements
- [17.19] Events That Do Not Constitute Termination
- V. [17.20] Administrative Relief from Invalid (Ineffective) Elections and Inadvertent Terminations
- VI. Tax Consequences of Termination
- VII. [17.24] Election After Termination
- VIII. [17.28] Conclusion
- Chapter 18 — Using the S Corporation in Special Situations and Current Planning Techniques
- I. [18.1] Scope of Chapter
- II. Use of S Corporation as Holding Company
- [18.2] S Corporations and the Holding Company Structure
- Using Qualified Subchapter S Subsidiaries
- [18.3] Qualifying for QSub Treatment
- [18.4] Tax Consequences of Making the QSub Election
- [18.5] Mechanics of Making the QSub Election
- [18.6] Electing QSub or S Corporation Status After Termination of the QSub Election
- [18.7] Using Equity-Flavored Compensation While Maintaining QSub Status
- Potentially Adverse Tax Consequences That Can Arise upon the Sale of a QSub
- [18.8] Background on the Termination of a QSub
- [18.9] The Tax Consequences of the Termination of a QSub Before the Small Business and Work Opportunity Tax Act
- [18.10] The Tax Consequences of the Termination of a QSub After 2006
- [18.11] Use of an LLC in Lieu of a QSub
- [18.12] Merger of an LLC into a QSub
- [18.13] Mergers Involving QSubs
- [18.14] “F” Reorganizations and QSubs
- III. Use of S Corporation in Connection with Limited Liability Company
- IV. [18.17] Special Considerations in Selling Business of S Corporation
- [18.18] Tax Consequences to the Selling Shareholders in a Stock Acquisition
- [18.19] Tax Consequences to the Selling Shareholders in an Asset Acquisition
- [18.20] Structuring an Acquisition by an Existing S Corporation Under the QSub Election Rules
- [18.21] Tax Planning Opportunities Under Code §338(h)(10) Election
- [18.22] Potential Tax Benefits to the Acquiring Party if Election Is Made
- [18.23] Tax Consequences to the Selling Shareholders
- [18.24] Mechanics of Making Election
- V. [18.25] Conclusion
- Chapter 19 — The Passive Loss Rules: Application to an S Corporation and Its Shareholders
- I. [19.1] Introduction
- II. [19.2] Background
- III. [19.3] Applying the Regulations
- [19.4] What the Taxpayer Is Trying To Determine
- [19.5] The Passive Activity Losses Checklist
- [19.6] Step One — Determine Whether the Taxpayer Is Subject to Internal Revenue Code §469
- [19.7] Step Two — Determine the Separate Activities of the Taxpayer
- [19.8] General Activity Rules
- [19.9] Grouping Activities
- [19.10] Limitations on Grouping Rental Activities
- [19.11] Activities of Certain Limited Partners and Limited Entrepreneurs
- [19.12] Activities Conducted Through Entities
- [19.13] Consistency Requirements
- [19.14] Grouping by IRS To Prevent Tax Avoidance
- [19.15] Reporting Groupings
- [19.16] Step Three — Determine Whether the Taxpayer Materially Participates
- [19.17] Participation
- [19.18] Material Participation Tests
- [19.19] Significant Participation
- [19.20] Personal Service Activity
- [19.21] Facts and Circumstances Test
- [19.22] Step Four — Determine Whether the Activity Is a Rental Activity
- [19.23] Exceptions to General Rule
- [19.24] Average period of customer use
- [19.25] Average customer use of seven days or less
- [19.26] Average customer use of 30 days or less with significant personal services
- [19.27] Extraordinary personal services are provided
- [19.28] Rental incidental to non-rental activities
- [19.29] Property customarily made available for nonexclusive use by various customers
- [19.30] Property provided to partnership or S corporation in which taxpayer owns an interest
- [19.31] Exception for Rental Real Estate Activities of Real Estate Professionals
- [19.32] Limited Exception for Active Participation in Rental Real Estate
- [19.33] Step Five — Eliminate Nonpassive Income
- [19.34] Portfolio Income
- [19.35] Personal Service Income
- [19.36] Self-Charged Items
- [19.37] Gross Income from Oil and Gas Properties
- [19.38] Additional Exclusions from Passive Activity Gross Income
- [19.39] Step Six — Determine Applicability of Recharacterization Rules
- [19.40] Significant Participation
- [19.41] Non-Depreciable Rental Property
- [19.42] Interest Income from Passive Equity-Financed Lending Activity
- [19.43] Income from Property Rented Incidental to Development Activity
- [19.44] Self-Rented Property
- [19.45] Pass-Through Entities Licensing Intangible Property
- [19.46] Additional Situations Subject to Recharacterization
- [19.47] Substantially appreciated property formerly used in nonpassive activity
- [19.48] Qualified working interests in oil and gas
- [19.49] Active participation rental real estate
- [19.50] Step Seven — Calculate the Passive Loss
- [19.51] Calculate Passive Activity Deductions
- [19.52] Calculate PAGI
- [19.53] Gain from disposition of an interest in an activity or an interest in property used in an activity
- [19.54] Income from Code §481 adjustments
- [19.55] Overall Net Loss
- [19.56] Net Loss for Each Activity
- [19.57] Loss Carryover
- [19.58] Step Eight — Apply PALs Following Disposition of an Activity
- [19.59] Sales
- [19.60] Gifts
- [19.61] Inheritance
- [19.62] Former Passive Activities
- [19.63] Partial Dispositions
- [19.64] Installment Sales
- [19.65] Disposition of Interest in Pass-Through Entity
- [19.66] Conversion of C Corporation to S Corporation
- [19.67] Mark-to-Market Election
- [19.68] Treatment of Passive Activity Credits
- IV. [19.69] Conclusion
- Index
- List of Forms
Authors
- Mark D. Anderson
Mark D. Anderson
Mark D. Anderson is a Partner in Coman & Anderson, P.C., in Lisle, where he concentrates his practice in federal taxation, estate planning, and corporate law. He is a member of the Chicago Bar Association, having served as Chair of the Federal Taxation Committee in 1998 – 1999, and the American Bar Association, serving as a member of the Section of Taxation. Mr. Anderson received his B.A. from Illinois State University, his J.D. from Loyola University Chicago School of Law, and his LL.M. in taxation from Georgetown University Law Center
- Kristy A. Bourgeois
Kristy A. Bourgeois
No bio available.
- Alexander F. Brougham
Alexander F. Brougham
Alexander F. Brougham is a Partner at Adelman & Gettleman, Ltd., in Chicago, where he concentrates his practice in business bankruptcy, reorganization, and commercial litigation. He has been regularly selected as a Rising Star by Super Lawyers and an Emerging Lawyer by Leading Lawyers. He was chosen to join the National Conference of Bankruptcy Judges’ Next Generation program (2014) and served as a law clerk to bankruptcy judges in Illinois and Massachusetts. Mr. Brougham received his B.A. from Colby College and his J.D. from Northeastern University School of Law.
- Mark A. Carter
Mark A. Carter
Mark A. Carter is a Partner at Hinshaw & Culbertson LLP, in Chicago, where he focuses his practice on corporate transactions and business restructuring. He is a member of the American Bankruptcy Institute and the Illinois State Bar Association Business and Securities Law Section Council. Carter has also been recognized in The Best Lawyers in America® for his work in corporate law (2023 – 2026). Carter received his B.A. with high honors from the University of Illinois at Urbana-Champaign and his J.D. from the University of Illinois College of Law.
- Zane M. Cohn
Zane M. Cohn
No bio available.
- Paul S. Drizner
Paul S. Drizner
Paul S. Drizner is a Partner in the Chicago office of Seyfarth Shaw LLP, where he concentrates his practice in taxation. Mr. Drizner is a member of the American and Chicago Bar Associations. He received his B.S. from the University of Illinois and his J.D. from Loyola University Chicago School of Law, where he served as an editor on the Loyola University Chicago Law Journal.
- Jeffrey K. Ekeberg
Jeffrey K. Ekeberg
No bio available.
- Timothy S. Farber
Timothy S. Farber
Timothy S. Farberis a Partner with Troutman Pepper Locke LLP, in Chicago, and concentrates his practice in transactional and regulatory issues. Farber is a member of the Illinois State and American Bar Associations. He received his B.S. summa cum laude from the University of Missouri and his J.D. from Washington University School of Law, where he was Editor of the Washington University Law Review, formerly Washington University Law Quarterly.
- Geoffrey F. Grossman
Geoffrey F. Grossman
No bio available.
- Michelle L. Heller
Michelle L. Heller
No bio available.
- Carson D. Maricle
Carson D. Maricle
Carson D. Maricle is an associate at Mathis, Marifian & Richter, Ltd., in Belleville, where he concentrates his practice in estate planning, probate, taxation, and general business law. He is a member of the Illinois and Missouri Bars. Mr. Maricle received a B.A. magna cum laude in both Criminal Justice Studies and Political Science from Southern Illinois University Edwardsville in 2006. He is a 2010 graduate of Southern Illinois University School of Law, where he graduated cum laude and served on the Board of Editors for the Law Journal.
- Charles W. Murdock
Charles W. Murdock
Charles W. Murdock is a Professor at Loyola University Chicago School of Law, where he teaches corporate and securities law. Professor Murdock is a member of the Illinois State Bar Association’s Business Law & Securities Section Council. He was involved in drafting the Business Corporation Act of 1983 and the Limited Liability Company Act. He received his B.S.Ch.E. from the Illinois Institute of Technology and his J.D. from Loyola University Chicago School of Law.
- Stephen M. Murphy
Stephen M. Murphy
No bio available.
- James A. Nepple
James A. Nepple
James A. Nepple is the Managing Partner of Nepple Law, PLC, with offices in Moline, Illinois, and Davenport and Muscatine, Iowa. He practices primarily in the areas of taxation, estate planning, trust administration, probate matters, retirement plans, business entities, and nonprofit organizations. Mr. Nepple has an A rating from the Martindale-Hubbell Law Directory and is a member of the American, Illinois State, Iowa State, and Muscatine Bar Associations as well as the Institute of Illinois Business Law. He received his undergraduate degree from Creighton University, his J.D. with distinction from the University of Iowa College of Law, and his Master of Laws in Taxation from New York University.
- Timothy W. O'Donnell
Timothy W. O'Donnell
No bio available.
- Michael J. Polachek
Michael J. Polachek
No bio available.
- William A. Price
William A. Price
William A. Priceis an attorney in private practice at growthlaw.com, in Warrenville, and focuses his practice on business, securities, and administrative law. Mr. Price was the 2012 recipient of the ISBA Section of General Practice’s Tradition of Excellence Award. He is a member and Past Chair of the Institute of Illinois Business Laws and the Illinois State Bar Association’s Section of Business and Securities Law and Section of Administrative Law. Mr. Price helped draft the Illinois Business Corporations Act, the Illinois Limited Liability Companies Act, the Illinois Limited Partnerships Act, the Illinois Uniform Partnerships Act, and the Illinois Not for Profit Corporations Act. He earned his J.D. and M.A. from Duke University and his A.B. magna cum laude from the University of Illinois Urbana-Champaign. He was also a Fellow at Deutsche Akademische Austauschdienst Fellow, Albert-Ludwigs Universitaet, Freiburg Im Breisgau, Germany.
- David A. Rubenstein
David A. Rubenstein
No bio available.
- Jeffrey S. Shamberg
Jeffrey S. Shamberg
Jeffrey S. Shamberg is a Partner at Neal, Gerber & Eisenberg LLP in Chicago, where he serves as head of the Tax Department. Mr. Shamberg earned his B.S. with honors from the University of Illinois Urbana-Champaign and his J.D. from the Northwestern University Pritzker School of Law.
- Daniel T. Sherlock
Daniel T. Sherlock
Daniel T. Sherlock is a Shareholder and Cochair of the Tax and Estate Planning Group at Vedder Price P.C., in Chicago, where he concentrates his practice in structuring mergers and acquisitions, reorganizations, private equity investments, investment companies, and business tax planning. He is a member of the Section of Taxation of the American Bar Association and the Federal Taxation Committee of the Chicago Bar Association. A former captain in the Judge Advocate General’s Corps, assigned to the U.S. Military Academy at West Point, Mr. Sherlock received his B.A. cum laude from Loyola University Chicago, his J.D. cum laude from the University of Notre Dame Law School where he was Notes Editor for the law review, and his LL.M. from New York University.
- Philip D. Speicher
Philip D. Speicher
No bio available.
- Jeffrey C. Wagner
Jeffrey C. Wagner
No bio available.
- Thomas P. Ward
Thomas P. Ward
No bio available.
- P. Douglas Whitlock
P. Douglas Whitlock
No bio available.
Limited Liability Companies and S Corporations (ARCHIVED 2013 EDITION)
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