LLC Partnership or Corporation

[rfk]

From the standpoint of creating an LLC as a partnership or corporation, which is best to utilize for tax reasons? I know that 2 or more members defaults to a partnership, but am wondering if this is a good structure versus selecting a corporate structure under the LLC umbrella.

Liability protection for an LLC as a partnership is a moot point since the LLC would protect. But wondering if there is an advantage of one over the other. The only thing I can think of for the LLC/Corporate is less restrictive than just selecting a corporate structure (less formality).

Thoughts about this?

Thanks.

rfk

[taxmandan]

The only thing I can think of for the LLC/Corporate is less restrictive than just selecting a corporate structure (less formality).
rfk

That's more or less the issue for most business owners, they tend to ignore the necessary corporate activity like annual shareholder meetings, keeping minutes of meetings, running major decisions throught the corporate recordkeeping, etc. The LLC format makes things simpler and less prone to legal challenges if they don't comply with the rules.

[Bees Knees]

I prefer the LLC to operate as a partnership. There is no need for payroll, unless the entity has other employees besides the owners.

[rfk]

Payrol for LLC Payroll

So, Bees Knees, I presume that it would then just be the "pass-through" situation, where the profits or loss would be designated and given to the partners? They would only take money out as distributions and not wages and take on their share of the circumstances if there are profits?

rfk

[Lion]

Shares

The corporate structure is restricted by the percentage of ownership when distributing funds to shareholders. They can make the distributions match what the shareholders perceive they should receive when they assign salaries, and then distribute profits. But now, you're in to payroll, as well as the corporate meetings/minutes, etc. The LLC/partnership can operate a bit more on the fly by working with guaranteed payments as well as then distributing (whether physically or just on the K-1) profits. So, if someone's working a bit more while another is ill, they can agree among themselves that the first gets another $1,000 GP this month.

If it's like pulling teeth to get your clients to record the information you need, then you probably want to discourage them from a corporate structure. If your clients run their business like a business, you can explain the differences in the various entities to let them choose what fits their needs.

[ChEAr$]

And for a "normal" business, I prefer an LLC with S corp status. Sufficient payroll makes
rest of profits not subject to se tax.

However if the LLC is just for holding real estate, I'll agree with Bees.

Example: father and son have an LLC (partnership) to hold the business property and an S corp to conduct operations of the towing business.

[Bees Knees]

And for a "normal" business, I prefer an LLC with S corp status. Sufficient payroll makes
rest of profits not subject to se tax.

Well, I take the position that an LLC member of an LLC taxed as a partnership is not subject to SE tax, except for guaranteed payments. Thus, you achieve the same results as an S corp without the hassle of having to do payroll.

[JoshinNC]

Agreed Bees

I am almost to the point of writing a book aimed specifically at tax professionals to help them understand this often misunderstood part of the tax code. It seems from convesations on this board that I would have a lot of customers.

[AJsTax]

I am almost to the point of writing a book aimed specifically at tax professionals to help them understand this often misunderstood part of the tax code. It seems from convesations on this board that I would have a lot of customers.

It would appear that you would also have a lot of disagreement from the tax courts also. That position just not make sense, but what does in our convoluted tax code? And yes I have read and participated in prior discussions. Even a meeting of 100 CPAs have several different opinions on the subject.

[ChEAr$]

It would appear that you would also have a lot of disagreement from the tax courts also. That position just not make sense, but what does in our convoluted tax code? And yes I have read and participated in prior discussions. Even a meeting of 100 CPAs have several different opinions on the subject.

And, of course, Congress has made no law.

[Bees Knees]

It would appear that you would also have a lot of disagreement from the tax courts also. That position just not make sense, but what does in our convoluted tax code? And yes I have read and participated in prior discussions. Even a meeting of 100 CPAs have several different opinions on the subject.

I would be curious for you to provide one citation where the tax courts determined an LLC member’s distributive share of partnership profits (other than guaranteed payments) was subject to SE tax. Congress specifically told IRS their regs were invalid, and to date, nothing has been done on resolving the issue.

[AJsTax]

I wondered who

I might wake up with that statement.
The courts have stated that being an LLC in a partnership does not automatically mean passive activity status. I believe it is only a straight line to state that if the activity is not passive then it most likely is self employment income and subject to SE. Why should being an LLC taxed as a partnership be exempt on SE income when a sole prop LLC is taxed on 100% of SE income?
Will we decide this among us before there are sensible regs written to address this ? no way. We each have to decide what is tax planning and tax evasion. I lean towards the fact of using an LLC to protect income from SE tax along with not paying reasonable salary in a S-Corp is closer to tax evasion.
The congress and the IRS are way too slow in correcting these problems and they probably have bigger fish to fry, so we might not see it for a long time.

[JoshinNC]

I derive my interpretation from the Code

The Code specifies that a general partner shall be taxed for SE tax on his/her share of the profits from a partnership. An LLC, by a matter of law, does not have a general partner, all partners are limited partners (the Code does not have a definition for a limited partner, only a definition for a general partner, so, by inference, any patner that doesn't meet the definition of a general partner is a limited partner). The Code also states that any partner shall be liable for SE tax on "guaranteed payments" which are specifically defined in the Code.

As such, I advise my clients that set up MMLLC's to never pay guaranteed payments (except for h/i paid for by the company on their behalf) and they will avoid SE tax on the distributive share of the profits.

As for your argument of the inequity between the treatment of SMLLC's and MMLLC's, that would hold no weight because there are similar inequities throughout the Code that do not automatically make one type of treatment for one circumstance the threshold for determining the treatment of a similar but not same circumstance.

Tax evasion is the willful failure to pay tax or report income. Tax avoidance is the utilization of tools within the Code to avoid unneccasary tax.

I enjoy this discussion and am more than willing to provide you with all of the statutory evidence I have gathered together over the last decade on this matter.

[Bees Knees]

I might wake up with that statement.
The courts have stated that being an LLC in a partnership does not automatically mean passive activity status. I believe it is only a straight line to state that if the activity is not passive then it most likely is self employment income and subject to SE. Why should being an LLC taxed as a partnership be exempt on SE income when a sole prop LLC is taxed on 100% of SE income?

The court case you refer to deals with one specific regulation that Congress did not say was invalid. Thus, the courts can use that regulation to make a reasonable case for LLC status as not necessarily meaning automatic passive activity.

However, to make the leap that it then means SE status is a huge leap. Taxpayers who are passive can also be subject to SE tax (for example, a passive sole proprietor or a passive general partner). Taxpayers who actively participate in a real estate rental are not subject to SE tax. Thus, SE tax is not automatically tied to passive or active status.

The code that deals with SE tax says a limited partner is not subject to SE tax, except for guaranteed payments in exchange for services rendered. It says nothing about passive or active status. Thus, in my opinion, the court case you refer to did not settle this issue.

Of course, the court could always make the claim that a distribution to an LLC member was really a guaranteed payment for services rendered.