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 University of Notre Dame in Illinois, USA
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/