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SMALL BUSINESS CHOICE OF ENTITY
It is common for business owners to conclude that they must change the legal form of the entity through which a business has been conducted. When incorporating a business that has been a partnership, CPAs should pay close attention to the form of the conversion because the method used can affect the tax consequences of the transaction.
Rev. Rul. 84-111 provides three ways to incorporate a partnership: (1) the "assets-over" method, in which partnership assets are transferred to a newly formed corporation; (2) the "assets-up" method, in which partnership assets are distributed to the partners in liquidation of the partnership, followed by the contribution of the assets to a newly formed corporation; and (3) the "interests-over" method, in which partnership interests are transferred to a newly formed corporation in exchange for corporate stock....