LLC: Ptr vs S Corp

[Jill Graff]

Situation: Client has just registered with the state as a 3-member LLC. They asked me whether they should be taxed as a partnership or S Corp. Their business (hospice services) will not have any income for about a year because of the prolonged licensing process. Until they receive their license, there will be no employees except for the members and no income.

Question: Would it a good idea to be taxed as partnership in 2007 and then, assuming they are approved to provide hospice services, electing to be taxes as an S-Corp beginning in 2008?

My thoughts are they would not have to fool with the payroll process initially. If they did not receive their licensing, then it would be easier to dissolve the LLC. I honestly can't think of a good reason to go the S-Corp route, but the attorney is pushing them.

I understand the SE issues, but since there will be no income in 2007, that is a non-issue. I really don't see why electing to be taxed as an S-Corp is a benefit anyway.

Thanks for any suggestions!

[JoshinNC]

They wouldn't have to fool with payroll if they were an S-Corp either

Situation: Client has just registered with the state as a 3-member LLC. They asked me whether they should be taxed as a partnership or S Corp. Their business (hospice services) will not have any income for about a year because of the prolonged licensing process. Until they receive their license, there will be no employees except for the members and no income.

Question: Would it a good idea to be taxed as partnership in 2007 and then, assuming they are approved to provide hospice services, electing to be taxes as an S-Corp beginning in 2008?

My thoughts are they would not have to fool with the payroll process initially. If they did not receive their licensing, then it would be easier to dissolve the LLC. I honestly can't think of a good reason to go the S-Corp route, but the attorney is pushing them.

I understand the SE issues, but since there will be no income in 2007, that is a non-issue. I really don't see why electing to be taxed as an S-Corp is a benefit anyway.

Thanks for any suggestions!

If they don't have operations there's no need for payroll, even if S status is approved. Tell your client's that they hired the attorney for legal advice and you for tax advice.

[Greenbriar]

Use attorney for legal advice

I always tell clients to discuss liability/risk issues with their attorney when chosing between LLC and C or S corp. In NJ there isn't as much case law on LLC's as corps and some attorneys feel there is better protection being incorporated while others say the protection is the same. Who knows. More interesting to me is the issue of forming an LLC and whether to be taxed as a partnership or as an S corp. I'd like to hear members' views on the pros and cons of each. Also, why would the attorney push them to be taxed as an S corp? It's still an LLC, not a corporation.

[winnie]

concur with Josh

If there isn't any income for the business then they don't need to have payroll as an S corp. Payroll is dependent on the facts and circumstances. Not having any income means that salary would not be reasonable.

Most of the time, I advise LLC's to go with S status vs partnership. The reason is the self-employment tax savings. While it may not be that significant once they actually start needing to pay themselves reasonable salary, it is still a tax savings when they can take some money from the company as a dividend w/o paying the Fica/Medicare tax. The S corp must pay reasonable comp, given their circumstances.

[sea-tax]

Can someone please clarify for me.

In regards to payroll and s-corp officers taking payroll or not is only an issue when the shareholders have a profit and then distribute money and have no payroll?

In other words even if there is a profit but the shareholders choose not to take a distribution or payroll then all is still well with this IRS payroll issue.

Somehow I remember a speaker at a seminar putting to the group similar to this.

[winnie]

S corp and comp

Since all of my clients need to get some money out of those corporations, I have never dealt with leaving all profits in the company. The only thing I have heard about is having dividend payments reclassed to payroll with all related penalties. And that seems to be happening a lot in the last few years.

As far as the LLC as a partnership, that is an interesting premise. Are other folks doing the same thing? Treating the partners as limited partners? I understood there was still some risks associated with this treatment.

[Jill Graff]

Non-SE

Aside from the SE issues, (and the more obtuse foreign members, different type of stock, etc) is there any good reason to be taxed as an S Corp?

[sea-tax]

Since all of my clients need to get some money out of those corporations, I have never dealt with leaving all profits in the company. The only thing I have heard about is having dividend payments reclassed to payroll with all related penalties. And that seems to be happening a lot in the last few years.

As far as the LLC as a partnership, that is an interesting premise. Are other folks doing the same thing? Treating the partners as limited partners? I understood there was still some risks associated with this treatment.

Winnie, I brought the officer comp up because lately I have seen a few new clients that have taken this whole payroll thing to the extreme.
I will give you an example.

Client was loosing approximately 30k a year but still taking payroll. Client was not making ends meat and falling behind on his payroll taxes. In fact the checks he issued to himself he sometimes did not even cash. This compounded his payroll tax problem.

When I asked him why he continued to take payroll he said because his prior preparer said he had to.
I just want to get everybody's opinion on this. If a client is loosing money is he required to take payroll or not?
My opinion is if you are loosing money then no payroll and no distributions until the company is in the positive.
Am I way off base in this line of thinking?

[winnie]

don't think so

If they are losing money, I don't have mine take any salary. You have an extreme situation there and I would stop the payroll immediatly and not pay out anymore until they can afford it. Reasonable comp is based on the facts and circumstances. If you don't have any money, then comp isn't reasonable to me. At the same time, they can't be drawing money out of the business as dividends, either.

[sea-tax]

If they are losing money, I don't have mine take any salary. You have an extreme situation there and I would stop the payroll immediatly and not pay out anymore until they can afford it. Reasonable comp is based on the facts and circumstances. If you don't have any money, then comp isn't reasonable to me. At the same time, they can't be drawing money out of the business as dividends, either.

Agreed, It is nice to see that I am not the only one with this idea.

[JoshinNC]

I have LLC members who have no SE income

I agree with Matt. I have LLC members who might take out $2000 this month, wait 2 months, take out another $5000, wait 3 months, take out another $10,000. These distributions do not fall under the definition of GP, "payments specified in the operating agreement to be paid on a specific schedule irregardless of business income", and therefore are not subject to SE tax. Some preparers are scared of this method, but until Congress passes a law saying these payments are SE taxable, we'll keep doing it.

[JON]

If you perform no

duties for the LLC I think you will win and no SE tax will be charged. If you are active and this is your only source of income-if audited-you will be charged SE tax. That is why you always have something as a guart. payment and some as withdrawals, at least then you will have an arguement as the compensation for services is covered. I still remember a couple of years ago at a seminar the instructor reviewing a case were the LLC had reported nothing as SE and this was the members only source of income. They did get hit for SE. I think a worse case would be 3 members in their early 60's finding out what that qualified them for for social security after using the LLC for 10-12years. I would have something signed from the members saying they agreed with no SE income.

Congress said no regs and IRS said how they would treat the issue and it was not LLC members have no SE income in all cases.

I think this issue has been discussed at length here.