When forming a new business or funding an existing business, you may think it’s a good idea to transfer assets to the business entity in exchange for ownership interest (i.e., transferring property to a business entity for shares in the company).

You may also be thinking about transferring certain liabilities (debt) to the entity. Transactions such as these are common, but the way you structure them can have serious tax implications. Sometimes, they trigger immediate taxation. Sometimes, they don’t.

The rules vary dramatically depending on whether you’re dealing with a C corporation, S corporation, partnership, or limited liability company (LLC) taxed as a partnership. The wrong choice, or simply structuring the transaction incorrectly, could leave you with an unexpected tax bill.

In this post, we explain what you need to know before you transfer assets or liabilities to a business entity.

Transferring Property Tax-Free: Tax Rules for Transferring Property to a Business Entity

If you’re wondering whether you can transfer property into a business without immediately recognizing taxable gain, the short answer is yes. But whether a given transaction qualifies for favorable tax treatment depends largely on the type of entity with which you are dealing:

• Corporation (that can be either a C corp. or S corp.)
• Partnership (GP, LP, LLP),
• Limited Liability Company (LLC) taxed as a partnership

Regardless of the type of business entity, the objective is to complete the transfer without triggering immediate taxation.

Transferring Property to a Corporation

If you’re transferring property to a C corp. or S corp., you generally qualify for tax-free treatment only if the people contributing the property collectively own at least 80 percent of the corporation immediately after the transfer. Specifically, the individual or the group contributing the property must collectively own: Continue reading… Continue reading… Continue reading…