1.0Arizona LLC Lawhttps://www.keytlaw.com/azllclawRichard Keythttps://www.keytlaw.com/azllclaw/author/1llclawyer/rich600338<blockquote class="wp-embedded-content" data-secret="lu3OsbPcE2"><a href="https://www.keytlaw.com/azllclaw/2013/09/s-corporation-tax/">Consequences of S Corporation Tax Method Termination</a></blockquote><iframe sandbox="allow-scripts" security="restricted" src="https://www.keytlaw.com/azllclaw/2013/09/s-corporation-tax/embed/#?secret=lu3OsbPcE2" width="600" height="338" title="“Consequences of S Corporation Tax Method Termination” — Arizona LLC Law" data-secret="lu3OsbPcE2" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" class="wp-embedded-content"></iframe><script type="text/javascript"> /* <![CDATA[ */ /*! This file is auto-generated */ !function(d,l){"use strict";l.querySelector&&d.addEventListener&&"undefined"!=typeof URL&&(d.wp=d.wp||{},d.wp.receiveEmbedMessage||(d.wp.receiveEmbedMessage=function(e){var t=e.data;if((t||t.secret||t.message||t.value)&&!/[^a-zA-Z0-9]/.test(t.secret)){for(var s,r,n,a=l.querySelectorAll('iframe[data-secret="'+t.secret+'"]'),o=l.querySelectorAll('blockquote[data-secret="'+t.secret+'"]'),c=new RegExp("^https?:$","i"),i=0;i<o.length;i++)o[i].style.display="none";for(i=0;i<a.length;i++)s=a[i],e.source===s.contentWindow&&(s.removeAttribute("style"),"height"===t.message?(1e3<(r=parseInt(t.value,10))?r=1e3:~~r<200&&(r=200),s.height=r):"link"===t.message&&(r=new URL(s.getAttribute("src")),n=new URL(t.value),c.test(n.protocol))&&n.host===r.host&&l.activeElement===s&&(d.top.location.href=t.value))}},d.addEventListener("message",d.wp.receiveEmbedMessage,!1),l.addEventListener("DOMContentLoaded",function(){for(var e,t,s=l.querySelectorAll("iframe.wp-embedded-content"),r=0;r<s.length;r++)(t=(e=s[r]).getAttribute("data-secret"))||(t=Math.random().toString(36).substring(2,12),e.src+="#?secret="+t,e.setAttribute("data-secret",t)),e.contentWindow.postMessage({message:"ready",secret:t},"*")},!1)))}(window,document); //# sourceURL=https://www.keytlaw.com/azllclaw/wp-includes/js/wp-embed.min.js /* ]]> */ </script> Question:  My multimember LLC filed an election to be taxed under Subchapter S of the Internal Revenue Code, aka S corp method of federal income tax.  Recently one of the members transferred 10% of the LLC to his corporation, which caused the IRS to terminate the S corp tax method.  Our LLC is now taxed as a partnership.  Do the other members of the LLC have a claim for damages against the member who caused the termination of the S corp tax method? Answer:  It depends.  If the loss of the S corp election causes economic harm to the other members they could sue for damages, but it would be a roll of the dice as to who would win.  The defendant member’s defense would be “I was free to transfer my membership interest and never promised to refrain from doing anything that would cause the loss of the S corp tax method.” If your LLC was formed by me then the Company and the other members would have a claim against the transferring member for breach of contract because every Operating Agreement I prepare contains a clause that says no member will take any action that would cause the LLC to lose its S corporation tax method, but it a member did cause the loss that member would be liable to the other members for damages. My Operating Agreements also contain language that prohibits a member from transferring all or a  portion of the member’s membership interest without the consent of a majority of the members. Caution about S Corp Method of Tax To be eligible to be taxed as an S corporation none of the LLC’s owners can be a corporation, LLC (unless [...]