Tax Case: Single Member LLC Brings In A Second Owner

Abstract

This paper presents a tax case simulating a real-world experience whereby a single member limited liability company that is currently classified as a disregarded entity, takes on a second owner. By default the entity will be classified as a partnership; however, if an affirmative election is made, the LLC could be taxed as a corporation or as an S corporation. Students are presented with two options for partnership formation along with hypothetical data and business objectives of the partners. They are then asked to consider the tax rules of two options, along with the resulting tax and economic impact of each option, in order to make a recommendation about the more favorable business alternative. Students are also asked to consider alternate forms of entity in addition to that of a partnership and the potential impact on the owners. In order to do this, students rely on fundamental knowledge learned in the typical business entities tax course and use their research and analytical skills to synthesize the most favorable outcome. Students are asked to deliver a tax memorandum which addresses a series of issues or questions, plus a client letter discussing the tax considerations as well as non-tax factors, in addition to Excel worksheets which outline the tax impact under each of the two options provided. As a result of this assignment, students discover the value of prudent and skillful tax planning, that additional, non-tax factors may need to be considered, and the positive impact they can have on the financial affairs of their clients.