1.1.2 Conversion of partnerships into liability companies
A Limited Liability Company is referred to as a “company” by The Income Tax Act (Cap. 470) and it defines it as, “a company incorporated or registered under any Law in force in Kenya or
When a partnership is converted into a limited liability company (LLC), there are several tax considerations to keep in mind. The tax implications of converting a partnership to an LLC can vary depending on the jurisdiction and the specific circumstances of the partnership. Here are some general points to consider:
- Partnership termination: The conversion of a partnership to an LLC is typically treated as a partnership termination for tax purposes. This means that the partnership must recognize any gains or losses on the disposition of its assets at the time of conversion. The partners may also be required to report and pay taxes on their share of any resulting gains or losses.
- Basis adjustment: The partners’ basis in the partnership’s assets may need to be adjusted upon conversion to reflect the fair market value of the assets at the time of conversion. This adjustment can impact the tax consequences of future asset sales or distributions.
- Tax elections: Depending on the jurisdiction, there may be certain tax elections available for the conversion of a partnership to an LLC. For example, in the United States, partnerships may elect to be treated as a “continuing partnership” for tax purposes, allowing the LLC to continue its tax status as a partnership without triggering a termination.
- New tax identification number: As an LLC is a separate legal entity from the partnership, it will typically need to obtain a new tax identification number, such as an Employer Identification Number (EIN), for tax reporting purposes.
- State and local taxes: The conversion to an LLC may also have state and local tax implications, such as changes in tax registration, filing requirements, and potential tax consequences for certain types of assets or income.
WHY CONVERT A PARTNERSHIP TO A LIMITED LIABILITY COMPANY?
The main reason for a partnership converting to an LLC is to enable the partners to avoid personal liability for the debts of the business. In a partnership, each partner has joint and several liabilities for the debts of the business. However, a member in a limited liability company is not responsible for the debts of the company. A member’s liability is generally limited to his contribution to the LLC.
TAXATION OF PARTNERSHIP TO A LIMITED LIABILITY COMPANIES
Income tax is payable at the corporation rate by companies and unincorporated organizations and associations (excluding partnerships, sole proprietorships, and interest or dividend paid by
a designated co-operative society) that have taxable income as defined by the Income Tax Act (Cap. 470) at a rate of 30% resident and 37.5% for non-resident Companies. The income of a partnership or a sole proprietorship on the other hand is not taxable on the business entity but is taxed on the individual partner or the proprietor. Each partner of a partnership and a sole proprietor is therefore required to declare his business and professional income as part of his personal income and pay tax as per his respective personal tax bracket If a business is converted mid-year therefore from a partnership into a liability company, the company will therefore have two accounts. One as a partnership and the other as a limited liability company and taxes will be paid as outlined in the foregoing paragraph