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PrintS Corporation Election
When comparing the limited liability company (LLC) and the corporation their tax implications are an important consideration.
While the election by the LLC is straightforward and uncomplicated, in contrast, the subchapter S election by the corporation can be more troublesome. The subchapter S election can only be made when, among other requirements, the corporation has 75 or fewer shareholders (100 or fewer shareholders for tax years beginning after 2004), there is only one class of stock (though there may be voting and nonvoting shares) and any trust holding stock meets certain conditions.
While the first two conditions will only rarely present a problem for the small business owner, the last requirement can preclude other planning opportunities.
Moreover, the tax rules governing subchapter S corporations are especially complicated and difficult to implement, adding more complexity and costs to operation of the corporation when the subchapter S election is made. When one subchapter S corporation owns 100 percent of a subsidiary subchapter S corporation, the subsidiary reports its income on the parent corporation's tax return, which should simplify the tax return process. Here, the subsidiary is termed a qualified subchapter S subsidiary (QSSS).
In asset protection planning, when a holding entity and an operating entity are used, and the owner has chosen to form two corporations as opposed to two LLCs, the owner usually will have the holding corporation form and own the operating corporation, and then elect subchapter S status for both corporations.
