LLC vs C-Corp - when does it make more sense for double taxation?
May 28, 2020
by a searcher from Lousiana State University in Houston, TX, USA
In contemplating legal entity structure, if the needs of a OPCO are sufficiently met in an S-Corp (LLC) type structure, when should a searcher consider opting for a C-Corp?
from Boston College in Steamboat Springs, CO 80487, USA
Prior to the 2018 tax changes, C-Corps were pretty much a non-starter, but the new law offers a few big advantages to the C-Corp structure. The first is that the new lower tax rate now means that C-Corps can have a competitive level of overall taxation with S-Corps, and the double taxation structure (once at the corporate level and then again at the dividends level) allows businesses that are likely to reinvest the substantial majority of their profits in the business to do so without triggering taxes on dividends, whereas an S-Corp would pass through all profits and losses directly. C-Corporations can also potentially benefit from the Qualified Small Business Stock (QSBS) exemption. This exemption can allow a substantial portion of eventual capital gains taxes to be exempted on the sale of the OpCo if all the conditions are met.
The benefits of the S-Corp include the Qualified Business Income (QBI) exemption, which can allow up to 20% of income to be exempt, as well as full passthrough of losses to investors. Since acquisitions often incur writedowns, goodwill amortization and other paper losses in the first years after acquisition, writing these losses out to investors can offer substantial tax benefits as well.
I think unfortunately, the best approach is going to be: model out some scenarios with you accountant and make the best choice for your expected situation. Hopefully some others will weigh in and correct me if I'm off on any of those points.
Much more here: https://frostbrowntodd.com/private-equity-and-venture-capital-fund-investment-in-qualified-small-business-stock-a-guide/
from University of Virginia in New York, NY, USA
Ultimately it is going to depend on your specific circumstances. In my case I was a self funded search and acquisition (sole control). I am a resident of NY with a business in Florida. I'm an LLC taxed as a C Corp which allows me to do several things:
1) repay debt at corporate tax rate (21% Fed / 5.5% Florida = 26.5%) regardless of residency. If I was a pass-though my effective tax would be massive in NY as distributions are taxed as ordinary income. Even in Florida where there are no state taxes I am better off repaying debt for the foreseeable future at the corporate level.
2). flexibility in salary vs. distributions. Yes there are some FICA benefits as a pass-though but being able to adjust salary after repaying debt in the later years (within IRS guidelines) will allow me to limit profits left in the company and avoid the dreaded double taxation issue.
3) QSBS exemption - in the event I do decide to sell after 5 years the first $10 million is tax free regardless of basis (which is important if you are getting 80-90% LTV). Yes there are specific rules that need to be followed (stock sale vs. asset sale) but due to the nature of my company there is little value in a stepped up basis for the acquirer and unknown liabilities are limited (no environmental, etc).
Everyone's situation is going to be unique, especially if you have outside investors but it is well worth the investment to speak with a professional if you are unsure how to proceed.