MACo Executive Director Michael Sanderson testified in support of Senate Bill 111, which would create a new exemption from the transfer and recordation tax for the transfer of property from a sole proprietorship to a limited liability company (LLC) if the sole member of the LLC is identical to the converting sole proprietor. The bill also addresses a loophole to prevent unfair tax avoidance. From MACo’s testimony:
Current law offers a variety of exemptions for transfers accomplishing a corporate restructuring. Small business owners who operate as sole proprietors are not able to benefit from these exemptions. SB 111 could benefit small business in the state by extending these same exemptions to the transfer of property from a sole proprietorship to an LLC if the owner of the business is the same as the member of the newly formed LLC.
The bill also provides a reasonable assurance that the new tax-free conversion will not trigger a new avenue for unfair tax avoidance. An LLC that is formed using this tax exemption would not be eligible to make further transfers of controlling interest without triggering suitable taxation under existing Maryland law. While this potentiality is not the intent of the bill, without this extra provision regarding subsequent property sales, a new avenue for tax avoidance could be opened, depriving land preservation and other programs their appropriate revenues.
Friday update: The Committee passed the bill Friday morning, with technical amendments, and will report it to the floor for full consideration next week.