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Dear Brass Tax Presentations,
After numerous back and forths with the owner of the C-Corp and upon her consulting with a friend of hers who has bought and sold a few businesses over the years, I think the deal is dead. I told her she could reduce the sale price (if it were considered a stock sale) to $480k (from $550k), and the buyer came back with ~$385k. I assume the lawyer is pissed at me because he was going to bank 8% on the transaction, but I believe the deal is dead, and the client is not going to work with him anymore.
Separately, I have two follow-up questions:
1. Since the deal is now dead and the client is going to search for a new buyer with another lawyer, does it make sense for the client to make an S-election? Her goal is to sell it next year (so there would be 2024 and 2025 for the S-Corp to be “in business”; the other three years, the money would just be sitting there to satisfy the 5-year requirement after the conversion from the C to the S-Corp).
- As discussed in the past, the C-Corp was established 1 year before the stock would have qualified as QSBS, and the owner has a basis in the stock of $178k. If the conversion from C to S and the resulting delay in getting the funds out of the entity is too cumbersome based on the prior sales price data, then I would rather not do the gymnastics
2. I also have a client who is in the process of purchasing his 4th restaurant in the last 3 years. His first three restaurants are LLCs, and he is tired of paying the CA LLC tax based on revenues. I have spoken to him about shutting down the LLC and re-establishing the restaurants as an S-Corp, which would be a pain, but he was open to it since he gets paid separately (from an employer) a wage that exceeds the FICA limit.
- Yesterday, I got a call from him while he was with his lawyer (if you’re keeping score, it was the SAME lawyer as the C-Corp sale), and he was in the process of simply making an S-election for the LLC so the client didn’t have to reopen bank accounts, credit cards, renegotiate leases, etc.
- My question in this circumstance is: Does making an S-election exempt the LLC from paying the Gross Receipts tax to CA? I don’t want the client to be in a position where he is paying the LLC tax based on revenue AND the 1.5% S-Corp tax based on profit
Thanks for your help.
From Brass Tax Presentations
For the first question about converting from C to S to avoid double taxation of the asset sale. You’re talking about holding the sales proceeds in there for 5 years, but that’s not how it works. The sale of the asset is what triggers built-in gain, not the distribution of the proceeds. So the simple fact that you don’t distribute the proceeds for a certain number of years is not going to help you.
On item 2, the attorney is right. You can just make an S-election to treat the LLCs as S-corps (so long as the governing document, like the operating agreement, doesn’t contain language that creates a second class of stock). If you go S-Corp, the gross receipts tax goes away, and you only have the 1.5% tax on net income—even if it’s an LLC taxed as an S-corp.