2.1.4.g: Tax Issues Influencing the Choice

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Abstract

Organizational tax issues [1] will revolve principally around the fact that earnings by a business operated in corporate form generate federal and state income tax on the corporate level.[2] When those earnings are distributed (if they are) by way of dividends (or in liquidation), they ordinarily generate additional tax again, this time levied upon the shareholders, and such dividends are not deductible corporate expenses. Avoidance of "double taxation" will drive the preference of planners toward the limited liability company format. There are, to be sure, ways to avoid double taxation[3] but the gate is substantially narrower than it was pre-January 1, 1987. The tax issues are extremely complicated; [4] much depends on facts and circumstances in a given case interacting with special rules, such as the exclusion from taxable income of a large portion (70 percent, down from 85 percent) of corporate dividends paid to corporate shareholders,[5] the