Comparison of LLC and S corporation
Unlike a corporation, where you must be in control (own at least 80% of all the stock) right after an exchange of property for stock to get tax-free treatment, there is no control requirement to get tax-free treatment for an LLC that is treated as a partnership for federal tax purposes.
IRC Section 721 of the Internal Revenue Code applies to exchanges of property for an interest in a partnership.
IRC Section 721(a) states that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. Section 721 has no control requirement.
Since an LLC with two or more members is treated as a partnership for federal tax purposes, Section 721 applies to multiple-member LLCs. This means, an LLC member's interest in the business may be as little as 1%, or as much as 99%, and still receive tax-free treatment in an exchange of property for an interest in the LLC.
A single-person LLC is treated as a sole proprietorship for federal tax purposes. A sole proprietorship is not a separate legal entity; the owner and the business are considered one and the same.
Gain or loss on personal-use property converted to business use in a sole proprietorship is recognized only when such property is disposed of.
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- Return to the Tax Basics for Startups Table of Contents to find related links.