Discussion:LLC vs. S Corp discussion only
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Discussion Forum Index --> Advanced Tax Questions --> LLC vs. S Corp discussion only
Discussion Forum Index --> Tax Questions --> LLC vs. S Corp discussion only
Actionbsns (talk|edits) said: | 17 May 2008 |
| There are currently two discussions regarding LLC's and S Corps and if I knew how to attach a link here I would. After I finish this I'll try in a second post. But my question regards the LLC entity choice and then the check the box decision to be taxed as an S Corp. Both of the other discussions have left me wondering if I'm missing something or something is left out, I'm inviting the discussion of this point here so not to confuse the issue on the other posts.
My thought is that it will boil down to one of the untried issues of the LLC vs making a choice to be an S corp. First I'm clear on the issue of S corps and C corps and how they relate to each other. But when a business starts as an LLC, my understanding is that the business makes a choice of how to be taxed by checking the box. That doesn't eliminate the LLC, it's only a method of taxation. So how could it be changed to a C corp by IRS revoking S corp status when it was never an S Corp in reality? The LLC is still in existence isn't it? What happens to that? The second discussion involved a client who dinked around with his LLC status which was taxed as an S Corp. The TA poster wanted to know if,because the client had not filed 1120S's for a number of years and had actually operated as a SP, could he clean up the past history by filing Sched C's. Why couldn't the client make another election to be taxed as a disregarded entity? I'm asking this because of the LLC that is involved. I understand that making choices like this when a real corporation has been established will present a different set of issues and they may be taxed. But the LLC is the entity and Scorp is how it is taxed. I'm sure JR's answer revolves around the Stupid choice. Personally, I would rather see a client become an S Corp from the start and leave the LLC out of it. | |
Actionbsns (talk|edits) said: | 17 May 2008 |
| I'm going to try this link:
http://taxalmanac.com/index.php/Discussion:LLC_taxed_as_an_S-Corp. | |
At least I learned how to do a link!!
| 17 May 2008 | |
| Agreed Action
But the LLC does not have as many stringent laws surrounding it as a straight S corp does so meetings, etc. are not required. At least here in FL, LLC is preferred by many and then taxation at the "S" level is elected for taxation savings. I hate LLC's as well....but I guess they serve a purpose... | |
| 17 May 2008 | |
| A SMLLC is a disregarded entity by default. If someone chooses to be taxed as a corporation and later changes his mind, he simply revokes the election. My guess is that if you don't follow the rules in the first place, the election is probably not valid. | |
| 17 May 2008 | |
| Regarding your 1st question of being changed to a C Corp - The election on Form 8832 is to be treated as an assocation, taxed as a corporation. Nothing is mentioned about S Corp status. You then file Form 2553 to elect S corp status. If you fail to follow the rules, or elect out of S Corp status, the entity is still taxed as a corporation if haven't revoked the origninal election. | |
| 18 May 2008 | |
| If an LLC is taxed as an S corporation, then two elections have been made: an election to treat the LLC as a corporation (typically Form 8832) and an election to treat the corporation as an S corporation (Form 2553). A few years ago, the IRS simplified the rules so that only the Form 2553 needed to be filed to jointly make both elections. If the S election is terminated, the corporate election is not. The only way to eliminate corporate status of the LLC is to make another entity classification election for the LLC on Form 8832. However, there is a 60 month limitation on changing entity classifications. If the original classification election was made on the date that the LLC was created, then the 60 month rule will not apply because there was no "change" in classification. | |
Actionbsns (talk|edits) said: | 18 May 2008 |
| Smktax, why would you use form 8832 to make the change? Why would you not use Form 2553 to change the classification back to SMLLC or partnership if that is what the business owner/s wanted to do?
If the business lost it's classification as an S corp and defaulted to C Corp status, then when you file an 1120 you will be calling this company XYZ, LLC? Because they are still not technically a corporation, they are still and LLC. Is that right? Has this actually happened to anyone? | |
TheTinCook (talk|edits) said: | 18 May 2008 |
| That is correct.
You still call it XYZ, LLC (because it still is an LLC) and you would still file a 1120 (because it is still being treated as a corp (assuming that the 60 month rule applies)). | |
| 18 May 2008 | |
| An LLC is an "eligible entity" under Reg. 301.7701-3. This means that the LLC can be "treated as" a corporation or as a partnership or disregarded entity. "Treating" an entity as a corporation for tax purposes does not make that entity a corporation for legal purposes. For legal purposes the entity remains an LLC. The tax treatment of the entity has nothing to do with its legal status. | |
Actionbsns (talk|edits) said: | 18 May 2008 |
| Thanks for the discussion and the citation. I think I understand what is happening in these instances now. | |
| May 19, 2008 | |
| Action, as I'm trying to think thru this myself, I think we're not seeing the problem from the right angle. We figure that the LLC elects it's tax status pretty freely and can therefore move it about freely. BUT, if an LLC were allowed to elect willy nilly, it creates all kinds of trouble. You could be a corp one year, the next year not, the next year in, and then out. How are you to do that? What happens to the treatment of retained earnings or accumulated adjustments, and the inherent differences for basis and all? So it seems rightly consistent to say that when the LLC has elected to be taxed as a corp, whether S or not, it's a one way road the same as any other corp. To get out, you have to liquidate and distribute and tax. Makes sense as I think about it. And brings out another inherent danger of the LLC checking the stupid box: if they lose S status, they're NOT back to LLC status, but C corp. Ewwww. | |
Actionbsns (talk|edits) said: | 19 May 2008 |
| Thanks JR, that's exactly what I was trying to get around. The point being that, the LLC who elects S Corp status and then has that revoked by IRS, will then be taxed as a C corp while maintaining it's LLC status. If five years have evolved, they could elect to be taxed again as either a partnership or disregarded entity. So then, another question, say five years have not evolved, only maybe three. They would be taxed as a C corp, at the end of the five year period, could they elect to make a change? They are still an LLC during all of this. | |
| 19 May 2008 | |
| LLC taxed as a corporation, you lose the real estate holding distribution/benefits, right (as JR1 alluded to)? LLC for state law purposes, but taxed as an S, for instance.
So all I'm doing by having an LLC taxed as an S. is to avoid corporate formalities such as annual meetings, minutes? Is that really a big deal? LLC taxed as S would still withhold on owners (W-2 the owners), so you are not saving any hassel there by having the LLC as S. Seems like overkill to me in that case. In addition, it seems to give the client another opportunity to goof something up. If I am glaringly wrong about what I've written, someone please tell me. | |
| 19 May 2008 | |
| By the by, on my summer/fall wish list is this book http://www.jamespublishing.com/books/llc.htm
I am hoping that it will teach some strategy on the legal side, cut out some of the hype, and let me know what I'm missing out on, if anything. Everything I've ordered from this Co., as far as law books, has been excellent, and very practical. I'll let you folks know what I think of it whenever $$ I buy it. I am putting this out for the tax folks here, because, after all, you have to train the lawyers anyway. | |
Death&Taxes (talk|edits) said: | 19 May 2008 |
| Book, what's a book, Crow? | |
| 19 May 2008 | |
| Hehe, it does have a disk for the forms.
But, I gotta have a real book. I'm from the old school. This is especially true when I'm trying to learn something new. I still have a feel for those old books, and I'm terrified that they may starting putting everything on disk pretty soon, with no options for a hard copy. | |
| 19 May 2008 | |
| Don't forget the liability protection aspect of entity choice. From a liability standpoint, an LLC electing S treatment may be a better choice than using a corporation to begin with
Either a corporation or an LLC protects the owners' assets from claims by creditors of the entity. This is called "inside-out" liability protection. In some states an LLC also protects the assets of the entity from claims by creditors of the owners: "outside-in" protection. In these states, a creditor of the owner does not get the ownership interest in an LLC, but can only get a "charging order," in effect an economic interest in the LLC (e.g., Calif. Corp. Code Sec. 17302(a)). The charging order gives the creditor (or the trustee in bankruptcy) a right to income distributed by the LLC, but not the right to stand in the member's shoes to dispose of the LLC's assets to satisfy its claims, or even to force the LLC to make a distribution of income. (Be aware that a bankruptcy court in Colorado has held that this "outside-in" protection does not apply to a single-member LLC.) As a result, many attorneys in charging-order states advise clients to organize an LLC, check the "corporate" box and make an S election, rather than just starting out with a corporation. | |
