Buzz Archive:
Tax Considerations in Choice of Entity, and Working with LLCs, Part 2

by George R. Goodman of Foley & Lardner LLP, 8/2/2007

Choosing the best business entity generally entails a two-tier analysis. First, the type of state law format or entity must be selected, from among a proprietorship or division, partnership, limited liability company, corporation, or trust. Both income and non-income tax considerations play a role in that choice. Second, assuming a particular state law format or entity, then its income tax classification must be determined. Obviously, that determination is based solely or almost entirely on income tax considerations.

LLCs are the most versatile entity from an income tax standpoint. LLCs can generally elect between being classified as a disregarded entity or partnership on the one hand, or a corporation on the other. If corporate classification is chosen or otherwise applies, then it may be possible to further elect between an S or C corporation. It often makes sense to set up a new business or venture as an LLC, or to convert an existing entity into an LLC, to minimize both income and non-income taxes. LLCs open up new possibilities in structuring mergers and acquisitions. LLCs can also be used to further estate planning goals. A business owner, accountant, or business law practitioner thus needs to have a good understanding of the many roles that can be played by LLCs and the potential tax savings they offer.

In the last half of a two-part detailed analysis, George R. Goodman of Foley & Lardner LLP, begins with a discussion of the non-income tax considerations in making the initial choice between an LLC and a state law corporation. Then, in a more detailed analysis, given the ability of LLCs to be classified at any time for income tax purposes, there is a detailed analysis of the income taxation of an LLC under each classification and the considerations relevant to a U.S. person in choosing among the income tax classifications.