Published in the Concord Monitor (11/21/2020)

A primary concern of all New Hampshire business owners during the coronavirus pandemic is to minimize business taxes, including, of course, New Hampshire taxes.

The two main New Hampshire business taxes are the 7.7% Business Profits Tax (the BPT) applicable to business entities with gross income of $10,000 or more; and the 5% Interest and Dividends Tax on interest and profits distributed to New Hampshire business owners by their own or other companies.

I'll talk about the BPT in my next column. As for the I&D Tax, here's what you should know if you're a New Hampshire business owner.

With a few narrow exceptions, the ID Tax applies to all New Hampshire taxpayers who own any business interest and who reside in New Hampshire. But a substantial percentage of affected taxpayers are owners of New Hampshire businesses, whether these taxpayers own them passively or not only own but also manage them.

In general, the I&D Tax doesn't apply to distributions of profits to their members from LLCs that have "non-transferable shares." By contrast, under the I&D Tax statute itself and the I&D Tax regulations issued by the New Hampshire Department of Revenue Administration (the DRA), all distributions of profits from business entities that are state-law business corporations to their New Hampshire business owners are subject to the tax. But there is a way than even New Hampshire owners of business corporations can avoid the tax. At the end of this column, I'll explain how.

The 'consent' rule

However, a substantial majority of New Hampshire businesses are LLCs, not business corporations. The Regulations provide in effect that if you are an owner of an LLC and you reside in New Hampshire, the first situation in which your LLC membership rights are "non-transferable shares" and thus you can avoid the I&D Tax on LLC distributions of profits to you is when, under your operating agreement or the LLC statute under which you formed your LLC, you are barred from transferring your membership rights to another person except with the consent of your co-owners.

The above rule may seem simple, but several important issues are implicit in it.

1. First, does the rule apply only to owners of multi-member LLCs or does it also apply to owners of single-member LLCs? The issue is unclear, but a strong argument can be made that it applies to owners of both multi-member LLCs and single-member LLCs.

2. Second, what kinds of transfers are barred? Again, the answer is unclear, but a strong argument can be made that transfers to family members and possibly to other persons are not subject to the I&D Tax as long as they are non-commercial transfers.

3. Third, how many of your co-owners must approve your transfer in order for you to avoid the I&D Tax? In my view, unanimity is not required: you only need the consent of co-owners owning a majority of the interests that you yourself don't own. Again, however, the answer to this issue is not entirely clear.

4. Fourth, does the above rule refer only to transfers of all of a member's membership rights, including both economic rights and non-economic rights (such as voting and contract-signing rights); or does it apply even if the transfers are only of economic rights? In my view, even the latter type of transfer will trigger the I&D Tax.

The 'dissolution' rule

The second way you can avoid the I&D Tax is when the governing LLC act or your operating agreement provide that upon your transfer of any of your membership rights, your LLC will automatically dissolve. You might think that this is a rule on which you'd never want to rely.

However, it's important to understand that under the New Hampshire LLC Act, the dissolution of an LLC doesn't mean its legal termination; rather, it merely means a change of its purpose from that of a going concern to that of a business that must be wound up and liquidated. And the New Hampshire Limited Liability Company Act provides that you can retract a voluntary dissolution. However, if you dissolve your LLC upon making a transfer of some or all of your membership rights and soon thereafter you retract the dissolution, there's a good chance that the DRA will claim say the dissolution was fake. (Please pardon the adjective.)

What can you do to avoid the I&D Tax on distributions to you from your company if it is a business corporation instead of an LLC? As long as your business remains a business corporation, the answer is "nothing." But New Hampshire statutory law permits you to do a procedure called a "statutory conversion" of your business corporation to an LLC. Once you've done the conversion, you can take advantage of the above "consent" or "dissolution" rule.

Your tax adviser will tell which of these two rules will suit you best. I'll explain how statutory conversions work in a subsequent column.

John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.