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