Distributions by LLCs: They can have significant income tax consequences

Limited liability companies (LLC) are popular because they provide their owners with limited liability and can be taxed as partnerships, resulting in only one level of taxation. However, partnership tax provisions can be quite complex, particularly those dealing with distributions of assets. The tax treatment of a distribution to both the LLC and its members depends on the type of distribution made. Distributions are current or liquidating and either proportionate or disproportionate. Gains but not losses may be recognized by a member in a current proportionate distribution. In a disproportionate distribution, both members and the LLC may recognize gain and losses. A loss of basis that may occur in either a current or liquidating distribution may be avoided through an IRC Section 754 election. The character of gain or loss on the sale of distributed property may depend on the nature of the property distributed and the length of time held. The consequences of a technical termination of an LLC will change as a result of a new proposed regulation.