When
comparing the limited liability company (LLC) and the corporation
and the various
tax
implications, you may choose to create a special arrangement
using both entity forms that maximizes benefits.
It may be possible to combine the LLC and the
statutory
close corporation to achieve both the
asset
protections afforded by the LLC and the possible
self-employment tax savings attributable to the corporation.
You can do this by
forming two
entities: a holding company and an operating entity.
As you recall, assets in a corporation will be subject to less
protection than those in an LLC, with respect to
claims of
your personal creditors. This risk can be mitigated by making
the holding entity an LLC and the operating entity a statutory close
corporation. The holding LLC would be the owner of the operating
corporation. Thus, the owner's personal creditors would have to make
claims against the LLC, to reach the operating entity's assets.
One problem that may arise is that allowing income to accumulate
in the operating corporation will make these assets vulnerable to
the claims of the business creditors. This problem can be mitigated
by
encumbering the operating corporation's assets with liens that run
to the holding entity.
However, the accumulation of earnings may not be an issue, or
even a possibility, for the small business owner. The chief reason
corporate earnings are accumulated is to redeem (i.e., buy back) a
retiring owner's stock. The redemption, if done properly, will
result in capital gains treatment, and thus lower taxes for the
retiring owner.
As a practical matter, most small business owners will not be
concerned immediately with retiring and cashing out of the business.
Further, most small business owners are not likely to be in a
position to accumulate earnings in the business.
The upshot then is that the small business owner seeking to avoid
self-employment taxes probably will want to use two LLCs as the
operating and holding companies, and
withdraw
funds through lease and loan payments. In addition, the IRS is
likely to provide some type of exemption for self-employment taxes
in LLCs in the near future. |