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Transferring Assets to a Corporation

Several readers have asked questions about transferring assets from their individual names to a Limited Liability Company (LLC). HT writes:

I have been running my business as a sole proprietor (Sch C) and want to change to an LLC. I have been depreciating several assets on Schedule C. Do I need to do anything to transfer them to the LLC? If so, how do I do this? Does it make any difference whether I choose corporate taxation for the LLC?

Questions dealing with transfers of assets to LLC´s always have to be answered on two levels. There are the state law aspects concerning property rights and limited liability, and state taxation; then there are the federal tax law aspects.

Since 1977, when the State of Wyoming passed the first Limited Liability Company act in the U.S. limited liability law has evolved and continues to evolve. Although the details of LLC law differ somewhat from state to state in the United States, the basics are the same for all 50 states:

* Unless an owner takes some action, such as agreeing to be a personal guarantor of company debt, the owners of an LLC risk only the amount of money they invest in the company — they are not personally liable for company debt;

* Perpetual duration — the LLC does not cease to exist when one of its members dies;

* Owners can participate directly in managing the company — there is no requirement for a board of directors or officers;

* No formal annual meetings are required;

* The LLC is a separate legal entity from its owners.

Most states originally required at least two members to form an LLC. Now most states allow single-member LLC´s.

HT´s question concerns a single-member LLC. I am going to answer from that perspective first, since it is less complicated than the situation where there are two or more members contributing assets to the company.

The LLC´s status as a separate legal entity under state law means that title to assets must be transferred from the individual owner´s name to the company´s name. The means of making the transfer depend on the type of assets involved. If HT is contributing a computer to his LLC, he can sell it to the LLC, in which case a simple Bill of Sale will suffice to transfer ownership (HT would want to have the LLC make out a check for the purchase price). Alternatively, HT may make a capital contribution of the computer to the LLC.

If HT has been using a vehicle for his business and wants to transfer it to the LLC, he will need to change the title with the state department that handles titles to vehicles, the same as he would if he transferred to vehicle to an unrelated third party. As with the computer, HT can either sell the vehicle to the LLC or contribute it as capital. HT will want to talk to his insurance provider before making the transfer. In most cases, he will need to get a new insurance policy when the vehicle is transferred into the name of the LLC.

If HT wants to transfer real property to the LLC, he will use the same means by which he would transfer real estate to an unrelated third party. The details of the process differ from state to state, but in all cases a deed is required. As with the vehicle, HT will want to talk to his insurance provider before making the transfer.

With real property, and possibly with the vehicle as well, if there is a loan secured by the property, HT may run into problems with “due on transfer” clauses. These clauses generally allow the lender to accelerate the note when title is transferred, that is, to require full payment of the outstanding balance of principal and accrued interest within a limited amount of time (often 30 days). Lenders will sometimes allow transfers to single-member LLC´s — if HT´s lender says it will agree to this, HT will want to get a written statement or waiver from the lender before making the transfer.