Discussion:New Company starting as LLC, then electing S-Corp

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Discussion Forum Index --> Tax Questions --> New Company starting as LLC, then electing S-Corp


DianeOffutt (talk|edits) said:

18 January 2007
Hi all,

I have a client, we are applying for an LLC then filing Form 2553 to elect S-Corp status. My question, when we file for LLC, since we know we will elect S-Corp shouldn't we file as CORP and the legal name of the company will be XYZ, Corp.

I am not sure if we must start with XYZ, LLC, then AFTER we file Form 2553 we can change the company name to XYZ, Corp.

Not sure if I am making too much of this, maybe either way is ok...but thought I would run it by this forum to see if anyone else has had the experience.

Thanks for all your help,

Diane Offutt Woodstock, Georgia

Bottom Line (talk|edits) said:

18 January 2007
Don't know anything about GA law but an LLC and a Corp are two different types of entities. Don't think you can use the "corp" name for an LLC (but every state is different). The real question is which type of entity is best.

DianeOffutt (talk|edits) said:

18 January 2007
LLC is easier to form and S-Corp status will allow profits free of SE taxation (client will be taking a reasonable salary. I will check the GA law before filing the articles of organization and go from there.

Thanks for replying Bottom Line.

Diane Offutt

Kevinh5 (talk|edits) said:

18 January 2007
Hi Dianne, I used to be in Woodstock.

In GA, the name needs to say "LLC" or "Limited Liability Company". You can get the rules at the Secretary of State's website.

Kevin

Pegoo (talk|edits) said:

18 January 2007
I don't see how it is easier to form vs a CORP / then electing S status. The only difference I see is State Filing Fees may be differnt for each type of entity.

Kevinh5 (talk|edits) said:

18 January 2007
Sometimes the client comes to us after the attorney has already LLC'ed them (they used to incorporate them). In our discussion with the client, we realize they SHOULD be taxed as an S-Corp. The election can save them from the IRS without having to go back to the attorney.

DianeOffutt (talk|edits) said:

18 January 2007
Thanks Kevinh5. Yes, I did go to the SOS website and found exactly what you said. Other than Articles of Organization for an LLC versus Articles of Incorporation and stating shares issued it seems it WOULD have been easier to form the corp THEN the S-corp election. Now when I see LLC instead of thinking either a PARTNERSHIP return form 1065 (more than one member in the LLC) or a Schedule C (single-member LLC) I need to truly see the letter from IRS advising what tax form to use. So far all my clients were either form 1065 or schedule c...so this problem is my first encounter.

Thank you again for all your help Kevinh5.

Diane Offutt

Kevinh5 (talk|edits) said:

18 January 2007
Diane - where is your practice? I was on Bells Ferry Rd north of Eagle Drive.

DianeOffutt (talk|edits) said:

18 January 2007
Company name Accounting Connections, LLC, in Towne Lake (The Fairways), home based business since Jan 04. My website is accountingconnections.org.

Do you still have a practice and if so, where?

Kevinh5 (talk|edits) said:

18 January 2007
I'm up in Asheville, NC now. Trying to sell my building on Bells Ferry in front of the new Super(?)WalMart and 1031 into something up here. We still have a home in Marietta - used to live in Sturbridge off Eagle Drive before Towne Lake was started. My website is www.myhdvest.com\blue

DianeOffutt (talk|edits) said:

18 January 2007
I will check out your website. If my business was larger I would look into purchasing a brick and morter office. However it is still managable as a home based business; most of my clients are via remote access or they are located within 10 minutes from me.

Nice to meet you and hope to talk to you more in this forum.

Diane

DianeOffutt (talk|edits) said:

18 January 2007
Kevin,
I just went to your site and noticed you are an enrolled agent. I am in the MAcc program at Kennesaw State College. I plan on sitting for the EA exam after graduation. It is nice to meet a fellow Georgian. I will keep you and your firm in mind if ever I come across a client in need of your financial services. My firm specializes in QuickBooks and income tax returns. We do not offer financial planning. 

Take care, Diane

JR1 (talk|edits) said:

January 18, 2007
Not to hijack the love-fest..(and hey, I was in Kennesaw last spring!) but my pref would be to definitely form a corp if a corp is what you want. There's just too much uncertainty in all this check the box stuff going on. Since you want a corp, form one.

Will (talk|edits) said:

18 January 2007
Not to mention the 100+ years of law backing the corporation in state and federal courts...

DianeOffutt (talk|edits) said:

19 January 2007
I agree, but for some reason my client's attorney seems to think this way is better???? I meet with my client today, so you KNOW I will be discussing this further with him. It just makes more sense to call the company WHAT it really is (in my simplistic approach to issues).

Thanks for all the input. Oh, and JR1 I hope you enjoyed your stay in Kennesaw.

Thanks for all the feedback. This is a great forum...informative and friendly.

Diane

JR1 (talk|edits) said:

January 19, 2007
I happen to like most attorneys. And that said, don't let him drive. The problem is that the attorney doesn't live with the tax issues later and many times doesn't care. He's got the legal structure set and done, and it's over as far as he's concerned. Unless that attorney understands tax law, and many do not, sadly...you're the one who will be living and maintaining whatever he cooks up. He has to understand the consequences or help you understand that there are none.

DianeOffutt (talk|edits) said:

19 January 2007
I agree (and now that I just finished discussing this with my client, he agrees). My client is meeting with his attorney and requesting Articles of Incorporation. I advised my client as soon as I SEE those papers we can file the necessary S-Corp election, Georgia Dept of Labor and Revenue ID numbers. The federal EIN number will be applied for today (now that we are clear on the legal structure).

Thanks again for all the great feedback.

Diane

CrowJD (talk|edits) said:

19 January 2007
Both the tax specialists and the attorneys are being trumped today, heck, the clients just set up their business through the net. For some reason known only to God, they seem to be fascinated by the LLC in all its permutations. In a typical law school, you will get three months of tax, and three months of Corp./Partnership, but they are both electives, and not required. The word accounting is not even mentioned. I have personally spent hours trying to learn partnership accounting on my own dime, books and what not. But let's all keep in mind, no one bothered with partnership accounting for years, the partnership form of business was dead before the MMLLC came out.

DianeOffutt (talk|edits) said:

19 January 2007
Hi CrowJD,

I have a few clients that did just that and they are now having problems and needing both tax and legal help. I guess they hear the words "Limited Liability" and think the LLC is the right move. They tend to not ask about tax issues until it is too late. I look at it as I am either proactive in their life and advise them on what is most beneficial to them, the client, or reactive and just be there when they need me.

Diane

CrowJD (talk|edits) said:

19 January 2007
I had a client in a very similar situation to yours Diane. They had been a 1065 LLC for a couple of years, and come to be crying about SE tax. I explained to them they probably should have been an S. Corp. from the get-go (even though the IRS is presently casting a wary eye on abuse of the SE tax issue with S. corps). Then, you get into the issue of well, why don't we just elect S. Corp treatment through the LLC. [Smile]. By the time I got through figuring out all the permutations of that...it just seemed to be a very strange animal. So they stayed a 1065 LLC. In the final analysis, the LLC seemed to be a fairly good fit for them since they were a professional practice, and could use flexibility in profit allocations, etc. P.S. I'm in GA, atlanta, as well.

JEllegate (talk|edits) said:

19 January 2007
In response to Dianne's original question(s)..we pratcice in NY and run into the LLC v SCorp issue quite often. We defer to the attorney as to what legal structure makes sense from a liability standpoint like most of you do. If an LLC is chosen we more often than not (assuming they qualify) have the entity make the tax election to be treated as an S Corp. Keep in mind that this is a tax election only...having no impact on the legal standing...the name does not change to XYZ Corp and none of the legal benefits are impacted by the S Corp election.

To CROWJD, was there some tax issue(s) effecting your LLC client's inquiry about electing S status after the fact? Or, was there a legal issue in the operating agreement that would restrict the manner of taxation? We've run into this several times and absent any significant HOT assets or accounting method issues (and again assuming that the S requirements are met) we've andorsed the S elections on a two or three of occasions. Am I missing something here?

We also remind the client that by making the S election they will be forgoing some of the flexibility of the LLC (admission of new partners, classes of stock and distribution issues). But, we presume that the S election could be terminated if need be.

CrowJD (talk|edits) said:

19 January 2007
JEllegate: it was my inexperience more than anything. I was terrified that I was going trigger some kind of taxable event, and I could not get the research I had done straight in my mind. There were no HOT assets (as I know now), and it would have been a non-taxable event. I agree with you that the vast majority of small businesses only need to be concerned about the tax effects going forward: they would essentially be an S. Corp., and probably happier for it. I have mentioned to them they could still do an S. election, and they still decided to stick with LLC as they probably do need the flexibility.

Nectar (talk|edits) said:

21 November 2008
Not to change the subject, I'm starting a new Concert Promotion co. For liability purposes, will go the LLC route. There is no large investment up front, just kind of "pay as you go".

All musicians & vocalists will be subcontracted, and paid from the proceeds. All concert expences will pay paid upfront out of my savings money transfered to the LLC account.

I notice the "S" corp option....My question is: For Tax and accounting purposes for this specific company circumstances, is this the best option for me?.......If not, why not? and what would be better & why?

Thank you

Bbowers (talk|edits) said:

21 November 2008
Maybe - depands & I would suggest sitting down with a professional. This is more involved than anyone can answer in a board response & the answer is not a generic fit for everyone.

Dianeoffutt (talk|edits) said:

November 21, 2008
Hi Nectar,

I agree with Bbowers above. There are TOO many issues that need to be addressed before making this decision. There are pros and cons to consider. I notice one pro that has not been brought up in this thread; SEC 1244 stock, which allows investors to purchase said stock. This type of stock enables a shareholder, in the event of loss, to claim ordinary instead of capital loss subject to limitations. This is just ONE of many issues that need to be addressed when making a decision about LLC, S Corp, C Corp, Partnership legal entities.

It will be a wise investment for you to get a good local accountant, experienced in taxation, to meet with you and discuss and shed light on this very complex subject. Make sure your accountant is licensed as either a CPA or Enrolled Agent; for there are too many tax preparers out there that think they are well versed in taxation due to their experience in tax preparation. THIS IS FAR FROM THE TRUTH. Filling out a tax return and understanding the complexity of tax law are two different vehicles.

I wish you good luck in your endeaver.

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