Because of its classification as a partnership for tax purposes, an Limited Liability Company (“LLC’) will be the preferable form of entity for a C corporation if the owners want to avoid the potential of double taxation says California Business Attorney Steven C. Peck. Peck also says “An LLC also offer significantly more flexibility in organization and operation than a C corporation”.
An LLC has significant tax and non-tax advantages over an S corporation. One major advantage is that an LLC is not subject to the restrictions that limit the availability and activities of S corporations:
- An S corporation is restricted to 35 shareholders;
- Only certain types of persons may be shareholders of an S corporation;
- An S corporation may own no more than 80 percent of the stock of another corporation; and
- An S corporation must allocate profits and losses pro rata and is restricted to one class of stock.
In contrast, California Business Lawyer Steven C. Peck says, “An LLC permits greater flexibility as follows”:
- An LLC may provide for special allocations and for disproportionate distributions;
- An LLC is not subject to the penalty tax for built-in gains and excess passive income;
- An LLC is not subject to the election and revocation rules of an S corporation;
- LLC members can increase their tax basis through allocations of the LLC’s debt, which allows members to deduct additional entity-level losses against their tax basis;
- An LLC can adjust its tax basis in its assets on the sale of a member’s interest or on the death of a member; and
- An LLC is not subject to the California corporate income tax, but is subject to a gross income fee.
About the Author
Attorney Steven Peck has been practicing law since 1981. A former successful business owner, Mr. Peck initially focused his legal career on business law. Within the first three years, after some colleagues and friend’s parents endured nursing home neglect and elder abuse, he continued his education to begin practicing elder law and nursing home abuse law.