{"version":"1.0","provider_name":"Arizona LLC Law","provider_url":"https:\/\/www.keytlaw.com\/azllclaw","author_name":"Richard Keyt","author_url":"https:\/\/www.keytlaw.com\/azllclaw\/author\/1llclawyer\/","title":"Consequences of S Corporation Tax Method Termination","type":"rich","width":600,"height":338,"html":"<blockquote class=\"wp-embedded-content\" data-secret=\"1Y0eVNnjlI\"><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=1Y0eVNnjlI\" width=\"600\" height=\"338\" title=\"&#8220;Consequences of S Corporation Tax Method Termination&#8221; &#8212; Arizona LLC Law\" data-secret=\"1Y0eVNnjlI\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\" class=\"wp-embedded-content\"><\/iframe><script type=\"text\/javascript\">\n\/* <![CDATA[ *\/\n\/*! This file is auto-generated *\/\n!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);\n\/\/# sourceURL=https:\/\/www.keytlaw.com\/azllclaw\/wp-includes\/js\/wp-embed.min.js\n\/* ]]> *\/\n<\/script>\n","description":"Question:\u00a0 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.\u00a0 Recently one of the members transferred 10% of the LLC to his corporation, which caused the IRS to terminate the S corp tax method.\u00a0 Our LLC is now taxed as a partnership.\u00a0 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:\u00a0 It depends.\u00a0 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.\u00a0 The defendant member&#8217;s defense would be &#8220;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.&#8221; 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\u00a0 portion of the member&#8217;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&#8217;s owners can be a corporation, LLC (unless [...]"}