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LLP and 1042

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If a firm is structured as an LLP, there are no shares.  Can an LLP convert to a C Corporation?  

If an LLP owns a company, and they want to sell 30% to the employees via an ESOP, can they "convert" the LLP to a C Corp so the owners can use a 1042?  Is there any way to enable the owners to get 1042 treatment?

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  • 6 months later...

The LLP could convert to a C corporation and do an ESOP, but it may not be an efficient tax approach for the owners and often Sec. 1042 will not be available.   Generally Sec. 1042 requires a 3 year holding period, and the LLP holding period will not be included if the incorporation is not tax free to the owners.  See Sec. 351 and Sec. 368(c) for the control requirement following incorporation and case law and rulings on the step transaction doctrine applied by the IRS.  If Sec. 351 does not apply, the incorporation is treated as a termination of the partnership and the related tax consequences to the partners needs to be analyzed.  

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