What are the Benefits Associated with Conversion?

For many businesses exploring the possibility of converting a business entity from a C or an S corporation to a limited partnership, the following benefits are sought: 1) exemption from franchise tax; 2) business asset protection; and 3) compression in value of business for transfer tax purposes. Under the Texas Business Corporation Act, a corporation may convert to a limited partnership. Immediately after the conversion, the limited partnership may elect under the check-the-box regulations to be treated as a corporation by filing Form 8832. If the limited partnership (converted entity) elects to be taxed as a corporation, the conversion of the corporation to a limited partnership should be deemed a tax-free F reorganization, which is a mere change in identity, form, or place of organization of a corporation. The converted entity will inherit the federal tax attributes of the former corporation including: taxable year, employer identification number, and other tax elections.

1. Franchise Taxes.
When a closely held corporation or limited liability company is paying high franchise taxes, such business might consider converting to a limited partnership to avoid the franchise tax. For years, Texas legislators have introduced amendments to Section 171.001 of the Texas Tax Code to subject limited partnerships to taxation. Yvonne Davis, a legislator from Dallas, Texas, recently introduced House Bill 894 which proposed to amend Section 171.001(b)(3) to change the definition of