Discussion:S-Corp or LLC?
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Discussion Forum Index --> Tax Questions --> S-Corp or LLC?
| 6 April 2009 | |
| I have a large schedule C professional poker player client and it's definitely time to put him in an S-Corp. We're going to start it for April/May and I am wondering people's thoughts on S-Corp vs. LLC with an 8832 Corp Election/2553 Election. Correct me if I have any of that doesn't make sense. I am sure there have been threads about this but my search often times out on Tax Almanac. I welcome anyone to post a link to a previous discussion that would help me. Is there any reason one is favored over the other for a single member S-Corp/LLC situation other than maybe the extreme flexibility of an LLC?
Thanks DS | |
| 6 April 2009 | |
| Yes, there are lots (and lots more) threads out here on this. Some of the threads will say to make it an S Corp if you want an S Corp, and not to mess with the LLC intermediary. IMHO, I think the LLC taxed as S is worth looking at. I find that most S Corps don't abide by the admin rules required of them, so now, I tend to recommend LLC taxed as an S Corp if I'm looking for the S Corp end result. | |
Supertaxnerd (talk|edits) said: | 6 April 2009 |
| I too have the same question. A client of mine needs to either be setup as an S corp or just keep the LLC and have them taxed as an S Corp, and I'm trying to pin-point which is better and why.
Wwtaxes, any particular reason why you would do it the way you suggested? Thanks. | |
| 6 April 2009 | |
| The admin requirements are greater for an S Corp and most S Corps don't follow them. So, if they aren't going to run the business as a real S Corp, don't make it one. Just keep the LLC and have it taxed as an S Corp. I believe it is JR1 that disagrees with this if my memory serves me right, and he's a much more reliable poster than I am! | |
| April 6, 2009 | |
| Yep, to me there are too many compelling and competing issues that have not been resolved between LLC and S corp law, so when they conflict, what do you do? There is a list on one of the threads. Bottom line, IF THERE ARE NO COMPELLING STATE ISSUES, if you want a corp, form a corp. State issues can be compelling like CA's fee. | |
Harry Boscoe (talk|edits) said: | 6 April 2009 |
| Just for the record would someone please identify the onerous "administrative burden" that an S corp cum S corp has, that an LLC cum S corp doesn't have?
Is this the stuff - the non-tax state-level stuff - that is supposed to be reason *not* to be a corporation at all, S corp or C corp? I want to be a player in this ongoing LLC vs S corp argument but I feel my guns aren't loaded... | |
| 7 April 2009 | |
| In Arizona there is an annual filing requirement with the Corporation Commission. An LLC has no such requirement. Also annual minutes of board meetings, and other legal stuff. You also have the problem of distributions not in proportion to stock ownership, which can invalidate your S-election. | |
| 7 April 2009 | |
| And in some states, if you don't follow up on all the corporation administrative stuff, your corporate charter can go "poof".
I could easily be wrong, but I think that the "single class of stock" requirement for S-corp election also applies to membership interests in an LLC. But if a single member LLC ceases to be treated as an S-corp, it turns into a disregarded entity whereas if an S-corp loses its S election, it turns into a C-corp which is a fate only slightly worse than death. Why does the above sound like a discussion in particle physics? | |
Harry Boscoe (talk|edits) said: | 7 April 2009 |
| "But if a single member LLC ceases to be treated as an S-corp, it turns into a disregarded entity whereas if an S-corp loses its S election, it turns into a C-corp which is a fate only slightly worse than death."
This is good, and I hadn't considered it before. Particle physics? Cold fusion. | |
| 7 April 2009 | |
| This is probably just semantics, NMex, but if an LLC taxed as an S-corp blows its S election, it would then be taxed as a C-corp, not as a disregarded entity. Not sure if that's the same thing you said or not. | |
| 7 April 2009 | |
| It's NOT the same thing that I said and if you are right, then I seriously missed the boat somewhere. Glad you spoke up.
I need to look and see when an entity can "un-check the box". | |
| 7 April 2009 | |
| Come to think of it, though, since a single-member LLC is a disregarded entity unless it opts for corp treatment of either sort, the best choice probably would be LLC-don't-check-the-box. | |
| 7 April 2009 | |
| I tend to agree with JR1's analysis and that's typically my advise. But in this situation you should probably take a step back and think about it practically.
Your client is a professional gambler, so I assume he will be the only owner/employee of the proposed entity. If this is true, then tax savings will be the only benefit he will realize as a result of forming. He will not enjoy any limited liability protection. So, I would probably form the S-Corp since it won't matter if he maintains the corporate formalities or not. However, if there are certain overly burdensome state requirements that make a corporation less desirable, then I might consider an LLC with an election. | |
| 8 April 2009 | |
| Treas. Reg. 301.7701-3(c)(1)(iv) says that, once made, and election cannot be unmade during the sixty months following the effective date of the election.
So, Trillium is right; if the LLC loses its S eligibility it gets taxed as a C corp not a disregarded entity, at least for a while. Of course, the taxpayer could dissolve the LLC but that's getting complicated. At this point, I don't see much to choose between the LLC and a corporation except for any state law considerations. | |
| April 8, 2009 | |
| There are significant nontax reasons to use an LLC rather than a corporation, no matter how it will be taxed. There are essentially zero reasons to prefer a state-law corporation for a small business.
If you're not qualified to provide corporate law advice, you probably want to stay out of this conversation with your client completely, beyond advising that there are no important tax differences. | |
