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  Copyright© 2003 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
 
 
Combining the LLC and the Statutory Close Corporation
http://www.toolkit.cch.com/text/P12_4881.asp

When comparing the limited liability company (LLC) and the corporation and the various tax implications, you may choose to create a special arrangement using both entity forms that maximizes benefits.

It may be possible to combine the LLC and the statutory close corporation to achieve both the asset protections afforded by the LLC and the possible self-employment tax savings attributable to the corporation.

You can do this by forming two entities: a holding company and an operating entity.

As you recall, assets in a corporation will be subject to less protection than those in an LLC, with respect to claims of your personal creditors. This risk can be mitigated by making the holding entity an LLC and the operating entity a statutory close corporation. The holding LLC would be the owner of the operating corporation. Thus, the owner's personal creditors would have to make claims against the LLC, to reach the operating entity's assets.

One problem that may arise is that allowing income to accumulate in the operating corporation will make these assets vulnerable to the claims of the business creditors. This problem can be mitigated by encumbering the operating corporation's assets with liens that run to the holding entity.

However, the accumulation of earnings may not be an issue, or even a possibility, for the small business owner. The chief reason corporate earnings are accumulated is to redeem (i.e., buy back) a retiring owner's stock. The redemption, if done properly, will result in capital gains treatment, and thus lower taxes for the retiring owner.

As a practical matter, most small business owners will not be concerned immediately with retiring and cashing out of the business. Further, most small business owners are not likely to be in a position to accumulate earnings in the business.

The upshot then is that the small business owner seeking to avoid self-employment taxes probably will want to use two LLCs as the operating and holding companies, and withdraw funds through lease and loan payments. In addition, the IRS is likely to provide some type of exemption for self-employment taxes in LLCs in the near future.

 

 
 

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