Partnership to LLC Conversion

Partnership to LLC Conversion

Conversion of LP into LLC: If I have a NY partnership can I transfer it to an LLC with the same members without paying and transfer tax?


You did not indicate in your question whether the entity is a general partnership or a limited partnership (LP). You also did no tindicate what assets the LP owns, but since you posted the question in the real estate section we'll assume you had real estate in the LP. Since this website cannot give state specific information (you have to consult a local lawyer for that) we'll give you general guidance and raise a host of issue that might affect you.

If your partnership is a limited partnership some state laws permit a conversion of a LP into a limited liability company (LLC) by filing a certificate with the state. The result of this will be an automatic termination of the old LP and a creation of the new LLC with all assets transferred to the new LLC by operation of law. If your state law does not have such a provision, or if the partnership is a general partnership (GP) you may have to distribute assets out of the partnership to the partners in liquidation of the partnership and then the former partners can contribute the assets to a newly formed LLC.

Regardless of the approach you use you have to address a host of issues in advance to avoid probelms. And don't assume that just because state law permits an automatic conversion there are no other issues. There may be.

If you do the automatic conversion under your state law you should not need a deed to transfer the real estate to the new LLC, it should happen by operation of law. This might avoid any transfer tax or other issues, but have local real estate counsel address this in advance to be sure. Regardless of the form your conversion takes be sure that your title insurane is not adversely affected. Perhaps you can get some type of endorsement from the title company. If not you might need a new policy for the LLC. It is possible that the conversion under a state statute may avoid the need of having to address this, but check with real estate counsel. Also, regardless of the form of conversion be sure to review with real estate counsel whether any mortgage on the property will be called as a result of the conversion. Will real estate leases be affected? If the tenant has a cancellation right in the event of a change in the landlord will it be triggerred?

Also check with your accountant concerning income tax issues. Will there be an income tax consequence? It might depend on the form of the transaction. While the LLC should be considered a successor to the partnership be certain that there are no other consequences.

Also, before converting be sure that you have evaluated the pros and cons. For example, a major reason for conversion of many limited partnerships to LLCs was to avoid the unlimited liability which the general partner has in the partnerhship. This can be avoided in an LLC. However, if you have to personally guarantee the mortgage or other matters, the limited liability in the LLC as contrasted to the partnership may not be that significant. Under state law limited partners cannot participate in management. In an LLC any member can participate in management unless the certificate or operating agreement provide otherwise. Many peopel, especially parents making gifts of interests in the entity to their children or other heirs, prefer the security a limited partnership offers by restricting participation.

Whatever approach you take there are a host of issues.

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