Tax Implications

Professor Fershee,
In class today you mentioned there are negative tax consequences in switching from a GP to a LLP (as well as switching between the others)-without going into too much detail, where/how are the tax ramifications felt? Who drives these relatively new partnerships, is it the IRS or does the IRS merely react to trends in business?
Thanks.

Professor's Response:
Actually, (at least in the jurisdictions I have seen) there are no tax consequences to converting from a general partnership to an LLP (with the caveat that there could be some limited circumstances or state anomalies). The major consequences are when a corporation converts to an entity under the partnership structure (e.g., LP, LLP, LLC). This can be deemed a liquidation and have major tax consequences.

As for the other part of your question, we'll talk about it in more detail today. The IRS does not drive entity formation or rules, but IRS decisions certainly impact entity choices. When a new entity type is created, the IRS determines how it will treat the new entity -- that impacts if and how people will use such options.