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LLC , and S Corp vs C Corporation

Twice in the last few months I have been approached by new clients who have started their business life with an LLC and are not sure if they should have set up a C Corporation. 

Generally speaking the pass-through of tax losses in the early stages of a start up corporation can be a benefit to the owner as he can take them as losses against other qualifying income on a personal tax return.

However the problem comes when there is more than one shareholder, and even more so when a company adds additional sharegholders for example if they grant stock to advisors and consultants as a way of leveraging stock for services to save on limited cash. Every time there is a change it affects the reportable tax distribution information.

Does anyone have any experience in how to handle the tax reporting for the various ownership shares that may exist during a single tax year?  I am considering converting from an LLC to a C Corp. Has any one got any experience in this, and how do you actually do this conversion?
 

Answers

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

I have done the LLC to C-corp conversion. LLCs are nice for the tax loss pass-through, but making it work as a startup company is fraught with annoying issues. Chief among them being how you deal with equity - be they actual shares or stock "options", b/c there are no stock options in an LLC. I think the LLC structure is most appropriate when you are a VERY early stage company with the proverbial "2 guys (or gals) in a garage". Once you start bringing on employees, if you intend to use incentive equity of any kind, I recommend making the C-corp switch.

Okay, so how much does that cost? $5-$10K depending on the cost and quality of your law firm. Theoretically it can be cheaper, but if you have any sort of operating history there may be ancillary things that need to be considered during the converstion (like existing stock or member share issues, ongoing contracts, etc.). I think the core filing and professional fees would be only a few thousand, but when is it ever that clean?

When you convert, you pay taxes (or get credit) for your share of tax gain/loss up until the date that the LLC is dissolved, according to your share of those gains/losses. Not so bad, really. But clearly you want your tax advisor in on this whole thing. And don't forget to have them (and your legal counsel) involved when you dissolve your LLC entity! Hope that helps.

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