Discussion:PC vs. scorp & multi state filings
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Discussion Forum Index --> Tax Questions --> PC vs. scorp & multi state filings
Cestrobeck (talk|edits) said: | 13 October 2009 |
| New client is an attorney and a partner in a multistate firm. He receives a K1 with multi-state attachments, and is required to file a personal return in each state. Prior CPA set up an scorp to run his partnership income through to reduce his taxes; now collegues are saying he needed to be a PC, not an Scorp, and that there are issues with states recognizing the scorp election. His K1 will now be issued to the Scorp, which will have multistate returns to file, I imagine.
I am aware that some states do not recognize the scorp elections, though I don't know which ones (I will have to research this, but any input would be appreciated!). Help me with the reprecussions of PC vs scorp -- I know some of you out there deal with this type of thing! Unfortunately, I've come in after the fact and am trying to catch up. Should we revoke the scorp election and revert to a corp? What are the reprecutions of not filing as a PC since he obviously should have -- and then does the scorp election negate that need? What is the best scenario for this client? States with K1s in 2008 K1 are CA, CT, FL, GA, IL, MA, ME, MI, MN, MO, NJ, NY, PA, TX, VA, WA. | |
| 13 October 2009 | |
| well, the advantage of the S corp is that he avoids the PSC treatment of a C corp. | |
| October 13, 2009 | |
| As much as I HATE C corps...I'm beginning to wonder now about the multi-staters...eliminates the 1040 fiasco at least. | |
| 13 October 2009 | |
| I don't see why your client cannot be a P.C. with an S-election. Am I missing something? If your client could make the proper filings with the Secretary of State of the State in which he incorporated to fix his problem of not originally incorporating as a P.C., then why can't you leave the S-election in place, rather than revoking it and defaulting to a C-corp? | |
| 13 October 2009 | |
| Some of those states do not have a filing requirement, one being WA, and I do not believe TX or FL do either. You might want to check on the rest, it will make your job a little bit easier. | |
| 13 October 2009 | |
| Ideally you would zero out the corporation's taxable income with salary. The beauty of putting a corporation (S or C, either way) between the partnership (probably an LLP) and the individual is that the partnership income is apportioned among the states where it does business, but the salary from the corporation is sourced to the place or places where the stockholder/employee performs his/her services. The corporation, whether C or S, probably has a filing requirement in all the states, but if no source income from the other states flows through to the stockholder, there's no filing requirement in the nonresident states for the individual.
There is no individual income tax in WA, TX, or FL, and Florida would require filing by a C corp but not an S corp. TX would require either an S or a C corp to file a return, and either would be subject to the "gross margin" tax. Some of the listed states, such as California and New Jersey, impose fixed-dollar minimum taxes on C and S corporations. | |
| October 14, 2009 | |
| PC is a state designation usually, and has nothing to do with IRS status. PC can be C or S, which is all that matters. A PSC is by def a C corp owned by service pros, and subject to obscene rates if you don't zero out the profits, forcing salary on all income. But perhaps avoiding multi state 1040's...pick your poison. Both are poison. | |
| 14 October 2009 | |
| I agree, don't get hung up on the PC, other than that it is a warning that you should tread carefully before recommending a C (because you are dealing with a professional practice).
On Katies post, that answers a real puzzler for me. I have noticed on a law firm sign when I was down in S. Georgia..."an LLC containing S. Corps." or something like that, and I always wondered what was going on. So, the professional himself would incorporate, then join the LLC/LLP? | |
| 14 October 2009 | |
| Crow, I'm sure you remember all this. Back in the dark ages before LLCs and LLPs proliferated in the late 1980s and early 1990s, professional practices were generally organized as general partnerships. Each individual partner was liable for the acts and omissions of all of the partners. If the partnership got into real trouble, all of the partners would be forced into bankruptcy. The accounting firm of Laventhol & Horwath comes to mind. The firm collapsed under the pressure of litigation and all of the partners went through bankruptcy. Here's a link to a story about it: http://philadelphia.bizjournals.com/philadelphia/stories/2002/08/05/focus9.html
In order to limit their personal liability for the acts and omissions of other partners, many partners in such firms organized PCs to replace themselves as partners. In effect, as I understand it, that limits the individual partner's liability to his or her own acts and omissions, and eliminates "vicarious" liability for the actions of the other partners. The LLP or professional LLC structure in use today gets the same result from a liability perspective. I suspect most of the LLC/LLP members that are PCs (S or C) today are throwbacks to the pre-1990s structures. Maybe inserting a PC between the professional practice and the individual provides an extra layer of liability protection, kind of like wearing a belt AND suspenders. But as I noted above, a member of a multistate firm can limit exposure to other states' taxes by using an intermediate PC and converting the flowthrough income into salary. Note also that this may not be effective in all states. Some states may require the salary to be apportioned in the same ratio as the income flowing through from the partnership. | |
| 14 October 2009 | |
| P.S. I remember the L&H situation so vividly because I knew the managing partner of the firm's local office. I had audited some of his clients when I was with the FTB in the early 1980s. He was a straight shooter, and we stayed in touch after I left the FTB. The firm's collapse was a real tragedy for him and his family, and I believed it was undeserved. | |
| 14 October 2009 | |
| Thanks. Yes, I'm familiar with some of that history.
I went from an associate in a firm, to sole practice, to working for a corporation, and back to an office sharing situation really (though we called ourselves partners), then back to sole practice. So, I don't have any direct experience with it. The most fortunate time of my life was when I was with a group of fellow sole practitioners back in the 1980's in one large building, we were all tenants. It had all the benefits of being in a firm, but with none of the arguments over money unless you worked on an individual case with one of the other lawyers. Great experience, and some of those people are judges today, so that helps. lol. | |
