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PrintPersonal Holding Company Tax
When comparing the limited liability company (LLC) and the corporation, you'll need to be aware of special tax implications that specifically affect corporations, but not LLCs.
A personal holding company is a regular "C" corporation that derives 60 percent or more of its earnings through passive income (interest, dividends, rents, royalties, etc.), where more than 50 percent of the value of the stock is owned by five or fewer individuals. In 2003 through 2008, the personal holding company tax rate is 15 percent of the corporation's undistributed earnings (per the Jobs and Growth Tax Relief Reconciliation Act of 2003), and is in addition to the regular corporate income tax. In 2009, the tax rate will revert back to the highest individual income tax rate of 35 percent. The tax does not apply to LLCs.
The tax is extremely complicated due to its many exceptions. In practice, the tax will not usually apply to small business owners. While the typical small business may be owned by five or fewer individuals, in most cases its income will not be passive, or will fall within some of the exceptions.
However, in an arrangement where a holding company and an operating company are used, the tax may very well apply to the holding company unless a consolidated tax return is filed. That consolidated return opens its own set of complications and complexities.
This tax can be avoided by making a subchapter S election, since S corporations are not subject to the tax. Once again, however, with an LLC you don't have to worry about dealing with this tax, or avoiding it.
