Assume Company ABC is registered as a partnership LLC (2 owners) and doing business for a few years. In the mid of a year, co. PQR buys co. ABC and thus owns it fully (100% of it). Note that PQR is also a registered partnership LLC.
Now, the subsidiary co. ABC becomes a disregarded entity and all the income/expenses etc. will be reported by co. PQR.
The CPA thinks this makes ABC a single-member LLC because it is owned by one parent co., PQR. He suggests adding one of the partners of PQR be given even a fraction of a % ownership of ABC so it will look like ABC is owned by two partners, the new person who is given some % (let's say 1%) and PQR (which now own 99%).
He says this will help avoid IRS tax treatment of disregarded entities and need to pay some tax penalties as we did not report the change of status from partnership to disregarded in August when acquisition happened)
I understand that "If the LLC is deemed a disregarded entity, in the eyes of the IRS, your LLC is not taxed as an entity separate from you, the owner." But in this case, the owner is another partnership LLC.
So I am not clear. do we still need to add another partner with just a fraction of ownership to make it look like ABC is owned by two different entities?
After all, the acquisition is nothing new. There are many acquisitions happening in business,. Not sure if in these acquisitions they show it as owned by the holding (acquiring) company as well as another entity to make it a partnership.
Has anyone any clarification on the tax treatment of PQR. IS giving some small % to another person necessary to make it look like it is a partnership?
Thank you in advance.
- Z
