Converting LLC to C-Corp to take advantage of 0% effective cap gains tax?

What is the name of your state (only U.S. law)? TX

Hi y'all! New here. I've got a question for you. I currently have a small business LLC (poised for significant growth), and I'm considering converting to a C-Corp to take advantage of the 100% exemption of capital gains (on small business investments held at least 5 years) that expires at the end of this year.

The goal of this would be:

1) Make myself exempt from capital gains tax (I plan not to sell in <5 years)

2) Make my business attractive to any potential investors (I would like to raise cash by the end of the year)

My main question is: Are there any restrictions on me taking advantage of this as an owner? That is, when I convert my business from LLC to C-corp, can I treat the C-corp shares I get as an initial "investment" and thus be eligible for the capital gains exemption?

For reference, here is the code: United States Code: Title 26,1202. Partial exclusion for gain from certain small business stock | LII / Legal Information Institute

Rather than telling us the law, how about you telling us the facts?

(By the way, the law you cited does not refer to you.)

I'm not quite sure over your savings theory as yet.

For some examples, see:
Topic Page 1

Part of the "Bush era tax cuts" extension last year was to increase the tax exemption on capital gains from 50% to 100%, provided

a) initial investment is in a qualified small business (<$50m gross assets, some line of business restrictions)

b) initial investment is made between 9/27/10 - 12/31/11

c) investment is held for >5 years

To put my question another way, if I'm the owner of my LLC, and I convert to a C-corp (before 1/1/12), I would assume this conversion counts as me "making an initial investment" - but are there any specific regulations you know of that prevent this? (For example, the shareholders of an S-corp that converts to a C-corp cannot benefit from this.)

smallbiz01 said:

Part of the "Bush era tax cuts" extension last year was to increase the tax exemption on capital gains from 50% to 100%, provided

a) initial investment is in a qualified small business (<$50m gross assets, some line of business restrictions)

b) initial investment is made between 9/27/10 - 12/31/11

c) investment is held for >5 years

To put my question another way, if I'm the owner of my LLC, and I convert to a C-corp (before 1/1/12), I would assume this conversion counts as me "making an initial investment" - but are there any specific regulations you know of that prevent this? (For example, the shareholders of an S-corp that converts to a C-corp cannot benefit from this.)

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You do realize that the double taxation issues could possibly outweigh the capital gains exclusion benefit? You do realize that if you have one bad year in that 5 year spread that the losses cannot be taken against your other income, but rather the corporation will have to carry any losses forward?

You do realize that when it comes time to sell your business that it might be less attractive to some potential buyers as a C-corp?

You have to look at the big picture.

if I'm the owner of my LLC, and I convert to a C-corp

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What type of conversion are you doing?

tranquility said:

What type of conversion are you doing?

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Excuse my naivete, are you referring to Topic Page 1 ?

Looks like I need to do some homework here on which one it will specifically be - I didn't realize how many conversion types their could be

Re: LdiJ, thank you for the feedback. I have a fast growing business that will likey be a C-Corp anyway, and I am on the verge of attracting PE growth funding - so I'm optimistic that my capital gains will be large (besides... what entrepreneur isn't optimistic )

I don't think you can buy stock with membership. You must use money or property other than stock. I think you are cashing out the LLC and then investing the money/property into the C-corp. This is important to establish basis.

tranquility said:

I don't think you can buy stock with membership. You must use money or property other than stock. I think you are cashing out the LLC and then investing the money/property into the C-corp. This is important to establish basis.

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Ah hah! I'm going to hit the books on how this would work some more. Thank you!