LLC vs. S Corporations

Today a shareholder in several S corporations asked me if the entities should be LLC’s instead and what the difference is. The first thing to realize is that they are both what is known as “pass through entities.”

Why they are called this is that they are not taxable entities for federal income tax purposes, and may or may not be for state income tax purposes depending on state law.

What may be the biggest difference between an LLC and an S corporation is that an LLC has fewer requirements for its classification to be considered valid. For a corporate entity to be considered valid and its existence upheld in court proceedings, it should have all of the operating characteristics of a corporation. Among these are properly documented annual shareholder meetings, annual elections of officers, and shareholder approval of corporate actions for the year.

Should an S corporation be dissolved to avoid these requirements? The answer is most likely not. In a corporate dissolution, liabilities would be paid off, and any remaining assets would be considered to have been distributed to the shareholder(s) at fair market value. If this value is in excess of their stock basis, the corporation will recognize a taxable gain.

As with anything discussed on my web pages, a consultation involving consideration of the specific facts that may apply to your situation is required, and nothing discussed here is intended to be a substitute for such a consultation, and should not be relied upon without such consultation.

Please contact me if you would like to discuss how anything mentioned in these pages applies to your specific case.

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