Legislation effective less than a year ago made clear “that recordation tax does not apply to an instrument of writing that transfers title to real property from a converting proprietorship to an LLC…”

However, the Office of the Attorney General is expected to issue an opinion in the relative near future interpreting that language, such that recordation tax will now be due on deeds transferring title to real property from any proprietorship, with more than one owner, to an LLC.

The limited liability company or LLC is an unincorporated form of business organization similar to a partnership. The LLC possesses a liability shield protecting its owner from liability to the same extent that stockholders of a corporation are insulated (this is not available with a proprietorship).

When properly structured, the LLC will be treated as a partnership (or as a sole proprietorship in the instance of a single member LLC) for Federal and Maryland income tax purposes.

The conversion of a business entity including a proprietorship, to an LLC, while generally advantageous, requires care if the entity owns real estate because the retitling of the property may be subject to transfer taxes.

As noted, Tax Property Article, Maryland Annotated Code, Sec. 12-108(y), as amended in 1997, provides, in relevant part, that recordation tax does not apply to an instrument of writing that transfers title to real property from a converting proprietorship to an LLC whose member is identical to the individual who owns the proprietorship.

By separate legislation, CA Sec. 4A-212 now provides that a proprietorship converts to an LLC upon filing of appropriate articles with the State Department of Assessments and Taxation.

When a conversion takes effect, the property owned “by the converting proprietorship remains vested in the converting entity.” CA Sec. 4A-213.

But, most significantly, TP Sec. 12-108(y) contains language describing a “proprietorship, comprised of one or more individuals, which is involved principally in buying, selling, leasing, or managing real property.

The Office of the Attorney General proposes in the draft opinion to narrowly interpret that language referring to multiple individuals comprising a proprietorship involved principally in the real estate business. Ordinarily multiple people jointly engaged in business are deemed to have created a partnership.

Given the express language of TP Sec. 12-108(y) it appears clear that the legislature intended to give the broadest application to this exemption from tax. The proprietorship referred to is intended to apply when real property is titled in the names of two or more persons who are not partners.

And the Attorney General has previously argued that this instance of property titled in the names of two or more persons only applies where the individuals hold the property as tenants in common.

But now, in a draft opinion to the Recording Clerks of the Court, that has not been released to the public, the Attorney General, proposes to reinterpret TP Sec. 12-108(y) such that recordation (and transfer) tax will be due on deeds transferring title to real property from any proprietorship, with more than one owner, to an LLC.

It is not anticipated that this opinion will impact general partnerships, limited partnerships, joint ventures, and LLPs that may also be exempt from tax on the transfer of property to LLCs.

As the Attorney General and the various County Attorneys throughout the State strive to collect taxes on real estate transactions, the laws of the State will be subject to varied interpretation. It is not clear how the courts will ultimately rule on these interpretations.

However, it may be necessary and proper to immediately convert existing proprietorships to LLCs, prior to the issuance of the proposed opinion.