LLC Tax Election

by a searcher from The University of Chicago - Booth School of Business

Feb 25,2023

Hi all, first time business acquirer here and have a specific question about LLC's tax election. I am thinking about buying an online business with a large seller financing note paid across 3 years. 

I understand many people favor an LLC electing to be taxed as S-corp to avoid double taxation. However in this case because I will have to be using most of the profits in first 3 yrs to pay down seller debt instead of distributing any cash flow to myself, wouldn't it make more sense to elect the LLC as C-corp for tax purposes and benefit from lower corporate tax rate (21%) on pre-tax income so I can pay down the debt faster, then later convert to a S-corp tax election when it comes the time to take distribution from the business? 

Any advice is greatly appreciated!

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searcher from The University of Chicago - Booth School of Business

There are indeed many wrinkles to this and super case specific. Really appreciate your insights ^Searchfunder member‌ ^Searchfunder member‌!

02/28/2023 | like reply | 0 likes

intermediary from The University of Chicago - Booth School of Business

Not a tax expert but I have not seen buyers use this approach. When you convert C to S, you have to record built-in-gain (BIG). In order to gain S benefit of single taxation upon exit, a) you have to remain under S for at least, I think, 5 years, and pay double tax on the BIG. If you exit before the 5 years, then you will be taxed as if you are a C Corp.
Further, make sure banks will allow for 3-yr seller note.

02/27/2023 | like reply | 0 likes

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