Thread: LLC v S Corp Excel Compared

The history of the exclusion for Limited Partners from FICA and SET is Sociopolitical. Congress debated
authorizing "wealthy" persons joining professional limited partnerships as limited partners (banking, brokerage,
accounting, legal, real property investment businesses) with minute fractional interests, for the sole purpose of
qualifying for Social Security and Medicare. Congress reacted with an exemption for limited partners to
reduce the onslaught of nonworking class participants.

Modernly, people presume planning to avoid FICA and SET is the norm. Nyet, during the 1930's,
tax planners assisted people with Social Security qualification strategies.

Result: Limited Partners and LLC nonmanager shares are excluded from liability for F.I.C.A. and
S.E.T. (IRC sec 1402(a)(13)).

- Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes.
- Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
- If more than 35% of losses can be allocated to nonmanagers, the limited liability company may lose its ability to use the cash method of accounting.
- A limited liability company which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
- There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment.
- In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.
- Some states do not tax partnerships but do tax limited liability companies.
- Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that limited liability company discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
- Conversion of an existing business to limited liability company status could result in tax recognition on appreciated assets.

Zahid: "Earnings of most members of an LLC are generally subject to self-employment tax."

Yes and No. It Depends. LLC Managing Member Shares are Subject to SET. LLC NonManaging Shares
are Exempt from FICA and SET.

?generally?
IRS Code Section 1402(a)(13) excludes earnings from Limited Partners from S.E.T.
LLC Members with nonmanaging units (shares) are classified as Limited Partners exempt from F.I.C.A and S.E.T.

To wit:



http://books.google.com/books?id=_nI...esult&resnum=6

Zahid: "Since an LLC is considered a partnership for Federal income tax purposes, if 50% or
more of the capital and profit interests are sold or exchanged within a 12-month period, the
LLC will terminate for federal tax purposes."

True, IRC sec. 708(b) governs tax termination.

However, Partnership tax and ledger accounting distinguish "income units" and "capital units".
An income unit = 1 share or right to allocation of 1 unit (1% or .1% or .01%) of INCOME.
A capital unit = 1 share or right to allocation of CAPITAL.

Business income is not income from capital (read active business income)
Capital income is not income from business (read investment income)

Example:
ABC LLC, is a 2 Member LLC with a contribution of $50,000 in cash and 2 trucks to LLC from Members.
2009 LLC Net Profit (DNI): $70,000
Valuation of Cash Contribution: $100,000
Valuation of Noncash Capital Contribution (equipment): $20,000
Capital Account: $70,000 per partner

2009 Partner 1 transfers 100% of LLC capital shares to Trust for Children
2009 Partner 2 transfers 80% of LLC income shares to Family Limited Partnership
Partner 1 retains 100% of income shares
Partner 2 retains 100% of income shares and 20% of capital shares

Partnership Endures Without Tax Termination
Partnerships distinguish Capital from Income shares.

Zahid: "If more than 35% of losses can be allocated to nonmanagers, the limited liability company may lose its ability to use the cash method of accounting."


I am unaware of support for the above position.
Why an LLC desires Cash v Accrual Accounting?

Zahid: "There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment."

Uniform Limited Liability Company Act (1996)
http://www.law.upenn.edu/bll/archive...0s/ullca96.htm

Corporation statutes are Identical in 50 states?

Zahid: "In order to be treated as a partnership, an LLC must have at least two members. An S corporation
can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect
partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects
to file as a corporation."

99% Income Shares to Owner/Operator
1% Income Shares to child, wife, best friend, cousin, coworker. Grant 1% ownership to employee to qualify worker as partner
for partner exemption from Worker Compensation statute*, ESOP LLC style (insert image of Marx, Che and O'man).
100% of Capital Shares to Owner

2 LLC Members equals 1065 qualification

* Employee to Partner discussion separate from Fight Night 1

"Zahid: Some states do not tax partnerships but do tax limited liability companies."

CA imposes a 2% gross income tax (GIT). Ledger accounting rules the tax sea regarding LLC GIT.
Define "gross income"? If a construction company accepts $100,000 as deposit for materials is that gross
income? No. It is a Level three restricted account (trust account). If an attorney firm LLC accepts a
$5,000,000 reward into the Attorney client trust account is the reward gross income? No.

Weakness detection alert. Pick at CA LLC Gross Income Tax.
(Insert image of wedge)

Zahid: "Minority discounts for estate planning purposes may be lower in a limited liability
company than a corporation"

Maybe, shmaybe.

Zahid & Helse Airplane LLC
Zahid 70% owner
Helse 30% owner

I offer 30% nonManaging Member LLC interest, subject to Managing Member Zahid's control.
LLC Operating Agreement restrictions on control and transfer rights:
1. Operators under age of 25 may not fly airplane
2. Transfers of interest to trust or other entities are forbidden (LLC Members fear loss of right to select new LLC Members (free transferability issues))
3. Failure to contribute to quarterly maintenance results in $100 penalty per infraction
4. Proof of FAA license and insurance required prior to inspection or boarding of LLC airplane
5. Location of plane at discretion of LLC Managing Member
6. Maintenance and fueling expenses controlled by LLC Manager subject to 100 mile radius limitation
7. Managing Member reserves right to use of LLC plane: June 1 - September 30 and December 1 - January 15.
8. LLC Manager fee for managing LLC is: $5,000 per year payable in advance, late payment = $100 per week

Any Offers?
70% discount?

Zahid: Conversion of an existing business to limited liability company status could
result in tax recognition on appreciated assets.

Ahhhh, Yeah.
Conversion of a S.P or C Corp to an S Corp "could result in tax recognition on appreciated
assets."

Our "crew" at AB is comprised of service providers.

Note: Readers of AB with personal or entity related balance sheets in excess of $5,000,000
are requested to visit the Keno room on the North side of the website, rap on door 3 times with 2 coughs
and await concierge's guidance. (Pardonme sarcasm)

Houses in:
Palmdale: $28,000
Sacramento: $18,000

Tax recognition, of appreciated assets, in the U.S.?