Re: LLC & S Corp

In a message dated 2/27/99 12:02:28 PM Central Standard Time,
bob@cstoneindy.com writes:

<< Nina,
 
 An LLC is the same way.  Everything passes down to the LLC "Members"
 (owners/partners) 1040 and is taxed at the personal rate.  But only
 taxed one time.  No Corp taxes and personnel taxes.
 
 I do not know the difference between an S Corp and LLC....but LLC is
 what we are (Cornerstone Communications, LLC).  Our venture capitalist
 pretty much insisted on it and our attorneys & accountants thought it
 was good.
 
 Bob
  >>


There are a few significant advantages and disadvantages when considering S-
Corporations and LLC's. Here are a few points to consider (this is not
intended to be all-inclusive, just the things I thought were important when I
set my business up in 1998, and in regards to my particular state).  Here are
some details that were provided to me by my legal advisor:

S-Corp advantages:
- the corporation's taxable income or loss are reported on the individual's
tax returns (this avoids"double taxation"
- more advantagous compared to C-Corps in that ti still provides limited
liability yet allows flow through tax treatment
- it may be that the nature of the S-Corp's business allows accumulation of
majority of profits (retained) without an accumulated earnings tax (this may
vary from state to state)
- S-corps are generally simpler to manage from a legal standpoint
- A single person may wholy own an S-corp

S-Corp disadvantages:
- If a corporate retirement plan has been set up, 5% stockholders are
prohibited from borrowing against the retirement plan
- capital gains on the sale of stock for an S-corp will not qualify for tax
credits under the capital gains exclusion
- many states restrict the date of the fiscal year end for S-corps
- for high tax brackets, the individual tax rate may exceed the current
federal tax rate for corporations
- many states will not allow foreign ownership of S-corps

LLC advantages:
- combines the limited liability of corporations and the flow through tax
tretment
- many existing partnerships can be converted to LLC's without tax penalty
- typically is not as highly regulated and restricted by rules that
specifically apply to S-corps (may have foreign ownership, may own larger
shares of stock in other corporations, may issue more than one class of stock,
etc), can be much simpler in terms of real day to day operation
- many states offer advantages over S-corps for real estate and other
leveraged investments

LLC disadvantages:
- many states do not allow solely owned LLC's but this is slowly becoming more
and more allowed
- LLC's have only been popular for the last 2-3 years...it may be difficult to
get specific legal advice (lack of precedence that has been well-evolved in
law for corporations)
- corporations cannot convert to LLC's (only partnerships) without significant
tax penalty
- some states impose a special corporate income tax rate specifically on LLC's
- LLC's are typically treated as partnerships for tax purposes
- many businesses (especially sevice industries and firms, such as law firms
and doctors, etc) are not allowed to become LLC's
- many states require that LLC's convert or terminate within a given time
frame (30 yrs is typical)
- partners in an LLC are subject to  a self employment tax on the distributive
share of the partnership's profits

In my state, the cost of setting up either way was fairly comparable.  After
looking at all the issues, I personally felt that an S-corp was the correct
choice for my situation.  Maybe Hank Heath could comment on this! Hope this
helps - 

Dave Brown
Search Professionals, Inc.
888-917-1112


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