LLC vs. Corporation - Posted by Ron

Posted by Randy_OH on April 17, 2002 at 20:34:50:

This is strictly between me and Miss Caskey. Sorry we have to duke it out in public, but to do it otherwise would not have the same effect. So please ignore our little feud. She started it, and I am simply doing to her what she did to me. Turn about is fair play, as they say. I am normally a very congenial guy. But when you pick a fight with me, you better be prepared for a good one.

LLC vs. Corporation - Posted by Ron

Posted by Ron on April 15, 2002 at 20:10:07:

All the information I’ve read so far compares the LLC vs Corporation for investor activities which are either “dealer” oriented or not ( in the IRS view). My business is real estate wholesaling (flipping contracts). Please tell me what are the tax implications and should I go LLC or corporation for the most favorable tax treatment?

Re: LLC vs. Corporation - misconceptions - Posted by SueC

Posted by SueC on April 16, 2002 at 12:55:03:

An LLC is a LEGAL entity not a TAX entity, with distinct characteristics. You should primarily explore an LLC for legal reasons, and take those into account when deciding what tax scheme to elect. In an LLC, you can choose whatever tax scheme you prefer. You can for example set up an LLC and elect to have C-corp, S-corp or parternship (K-1) tax treatment. Tax treatment is not the main issue, as you can get corporate tax treatment within an LLC legal structure.

I’m not saying there are not tax reasons to choose an LLC, but the misconception seeems to be that an LLC is different from a corporation for tax reasons, and that is not the main difference, the legal structure is.

Depends… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 16, 2002 at 06:32:24:

on your personal financial details and your state. Most investors find an S-corp to be the best choice for what you propose…most, but not all!

John Hyre

Re: LLC vs. Corporation - misconceptions - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 17, 2002 at 19:21:39:

I don’t think I agree. While LLC’s have legal differences when compared to other entities, those differences are fairly minor when compared to the tax impact of choosing another entity/electing how to treat the LLC for federal income tax purposes. The non-tax issues in my mind include:

  • informality of LLC requirements in contrast to corporate requirements (e.g.- annual meetings, minutes, etc.). This is a minor benefit at best, because I recommend that such formalities be followed even when not required…they revolve around communication and documentation, and are simply good business practice.
  • charging order protection: significant, but not well-fleshed out in the case law. More valuable for larger companies, because the purpose is to avoid having creditors disrupt business and investment…where smaller entities are concerned, this purpose is weaker…still, it’s signifcant, and is a good reason to form LLC for all entities and elect appropriate tax status, be it partnership, C-corp, etc.
  • State fees may differ between entity types…almost a tax issue, and usually fairly minor.

I think that the tax impact of entity choice far outweighs the above factors. Bottom line, most entities provide very similar state-law benefits, but very different federal tax impacts. There is a good argument for always choosing LLC (in most states, see !) and electing appropriate federal tax treatment…and I DO think that the federal tax treatment is still THE criterion that drives the decision.

Went to a choice-of-entity once…the “teacher” was rather new and talked about non-tax reasons for choice of entity. That was a quick talk, then he just sort of ran out of steam. I helped the poor guy out and picked up from there- my part as a “student” lasted longer than his as a “teacher”- and involved more dollars. Tax matters more for entity selection, though non-tax is certainly relevant.

Would you agree?

John Hyre

Re: LLC vs. Corporation - misconceptions - Posted by Randy_OH

Posted by Randy_OH on April 16, 2002 at 23:33:44:

This is an incorrect statement. It shows your ignorence of the federal income tax law. You should refrain from answering any tax-related questions on this forum until have completed at least one basic tax course.

Re: LLC vs. Corporation - misconceptions - Posted by SueC

Posted by SueC on April 18, 2002 at 04:00:33:

I don’t think I disagree that tax ramifications when choosing an entity is of primary concern; in fact, I often tell clients I defer to the tax advice of their accountant. However, the point I was making was that often, posters here and many clients who come to me ask, “Should I form an LLC or a C-corp [or S-corp, or partnership]” as though they are different from a tax scheme perspective. They don’t have to be. I think the misconception I refer to is that the LLC is not defined by tax law (as between say C and S corps) but by its legal structure. The beauty of the LLC is that although there are default rules, those can be modified to suit the organizing members’ wishes to create a more flexible entity (I think to a greater degree than you mention, but of course it will always depend on how comfortable each attorney is with different alternatives). It is true that these choices have not been as tested in court as corporate issues, however LLCs have been used for decades now in some jurisdictions, and there is beginning to be a body of common practice that I think it will be hard to overturn. For example, as you are aware, some attorneys no longer even create wholly owned subsidiary C-corporations for their corporate clients - they simply create a series of single member LLCs. Many corporations are actually switching over to LLCs for the flexibility they offer. Would it be harder (i.e. more expensive) for a “little guy” to defend their choices in court? Probably. But I think (important qualifier!!) not if their lawyer and accountant are following the wave of current practice.

Since an LLC can choose the tax scheme under which they wish to operate, naturally those issues will be of significance. I guess the point I was making is that the choice of an LLC vs. a corporation for tax purposes is sort of a false choice. I would side with those you mention in your second paragraph, that there is a good argument - in some states - for always choosing the LLC. As you note at the outset, there are of course oddities in each state that may not make it so.

Ironically, I live in PA, which makes it NOT the best vehicle to use in many cases, particularly for real estate investment, due to the lack of charging order protection (in PA, NV and WY). However, it can certainly be used in much the same way related corporations are used to offer protection in other ways. If the client’s preferred tax scheme is the C-corp, however, I often recommend and set up the LLC.

Nice to hear your perspective John, measured as always :slight_smile:

Re: LLC vs. Corporation - misconceptions - Posted by SueC

Posted by SueC on April 17, 2002 at 12:33:59:

Well,since you don’t say what was wrong with my post, it sounds like a purely personal attack. Why not post exactly what the problem was with my post?

I already sent you off-list a link to the professional discussion list talking about this subject, perhaps you should post there. In my experience, many many accountants and lawyers are unaware of the facts I posted about.

Re: LLC vs. Corporation - misconceptions - Posted by SueC

Posted by SueC on April 17, 2002 at 12:11:18:

You don’t state what is wrong with my comments, so I can only assume your point is meant as a personal attack and not as information, I hope readers of your post take that into consideration.

I would again point you to the professional discussion list on the subject, available to accountants and lawyers only, which email address I have previously provided to you. Perhaps you will learn something you did not know before.

I am always happy to learn something new, which is how I felt when I learned about the information in my post. It is not common knowledge among either accountants or lawyers. I assume that is why you are unaware of it as well.

Re: LLC vs. Corporation - misconceptions - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 18, 2002 at 06:49:37:

I think that you bring out a good point, in reminding us that these decisions are state specific. We talk in generalities, but local law may run counter to our broad statements. That’s one reason to get good advice from a professional, as opposed to doing it on your own. Another is the highly detail-oriented nature of the entity decision, at least from a tax standpoint. Personal- and I do mean personal- details (kids, what they cost, pension issues, etc.) all play a role.

I must admit, I’m not quite clear as to your overall message. I agree that LLCs are quite flexible for tax and state law purposes, as well as the importance of local law. But I do not quite get what you mean by “false choice”…I think what you are driving at is that the LLC is really cool and really flexible in most jurisdictions, lot’s of people are using them, and that you still have complete flexibility as to tax issues, at least in most states. In other words, there are two levels of choice in most instances: Where the LLC does in fact offer complete tax flexibility, you can make the decision to select it based on non-tax issues (e.g.- availibility of charging orders, etc.), and THEN make whatever federal/state tax election you’d like…more of a bifurcated selection methodology, as opposed to a completely integrated one. Fair summary?

John Hyre

Re: LLC vs. Corporation - misconceptions - Posted by Randy_OH

Posted by Randy_OH on April 17, 2002 at 13:51:02:

You need to take some tax courses before you try to answer tax questions. It is not my responsibility to educate you.

Re: LLC vs. Corporation - misconceptions - Posted by SueC

Posted by SueC on April 18, 2002 at 07:34:31:

Yes, I think you’ve clarified my point. The error I think some people make (laypeople usually) is that “LLC” is a sort of third tax entity, after the C corp and S corp, kind of like a partnership. I often see the question on the boards here, “Which should I set up, a C-corp or an LLC? A Corp for flips and an LLC for holds?” etc. Those kinds of questions, when the two entities can be nearly identical, I think serve to illustrate that the questioner may not have a precise understanding of just what exactly an LLC is - a legal entity based on state statute, for which Federal tax law allows a choice of tax scheme. Which is why I posted the way I did in response to the question that started this thread. Thanks for illuminating this topic.

Re: LLC vs. Corporation - misconceptions - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 17, 2002 at 19:56:25:


If your going to kick sand in someone’s face, you need to be ready to put up your dukes. Personally, I try to be polite, even when I think the other guy’s dead wrong. I get unfriendly once the other guy kicks sand in my direction. Don’t be the other guy, it’s an inferior way to be. If you disagree, say it AND explain it.

Your posts on the main NG bring up some great points, I look forward to some spirited and friendly debate, especially now that tax season is over.

John Hyre