LLC vs. S Corporation

Question:

My accountant recommends an "S" Corporation rather than a LLC becasue LLC's are taxed as partnerships and that is more complex. What do you think?

Answer:

The LLC offers more flexibility than an S corp. Remember only qualified persons can hold S stockwhereas anyone or any entity can own a membership unit of an LLC. There is alimit on the number of shareholders an S corporation can have (75). While both an S and an LLC are generally small in number, the LLC can have an unlimited number of members.

An S can only have voting and nonvoting stock, which must otherwise have all other similar rights. An LLC can create whatever kind of membership interests it wishes, so long as the economics are properly reflected in each member's capital account.

Further, if you intend to put real property into a corporation, you will be subject to the problem of double taxation on the appreciation, whether it is a C or an S. The problem with having real estate in an S corporation arises when the
owners refinance the property and want to take out the cash. If the
property has appreciated in value, the cash that they want to take out will
be taxable to the extent it exceeds the basis of the S corp stock and the
shareholders get no basis in their stock for the corporation's debt to the
lender. With a partnership or LLC taxed as a partnership, the partners get
basis for the partnership's debt to the lender so the cash taken out will
not be currently taxable.


More critical to many lawyers is the fact that an LLC has a charging order that prevents a multi-member LLC from having its assets seized or the entity liquidated whereas an S corp. does not have this same benefit of a charging order and can become a shareholder with voting rights without the consent of
the other shareholders. With a single member LLC it is a moot issue as the courts will take the LLC membership interest, give it to the creditor and the creditor can liquidate the LLC.

Yes partnership taxation is more complex, but it is something to learn as you will indeed need to know it. Further, as far as the partners are concerned, the subtitles of partnership taxation can be easily handled by their tax lawyer and accountant.

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