In a high percentage of cases the Subchapter S corporation
and the LLC is used in entrepreneurial business formation often for the reason of liability protection.
In the case of an asset sale by a Subchapter C corporation (and in some cases a Subchapter S corporation
), the deal generally faces two levels of taxation.
Court of Federal Claims that had ruled disbursements to the shareholders of a Subchapter S Corporation
for the payment of state income taxes to be allowable costs.
By contrast, LLC owners and Subchapter S corporations
avoid this double taxation on a sale of assets because the business's tax liabilities are passed through them; the LLC or S corporation does not pay a tax on its income.
(528) Subchapter S corporations
are so called because they are organized under Subchapter S of the Internal Revenue Code, 26 U.S.C.
Many Subchapter S corporations
are locked into elections made years ago; while they would prefer to adopt the tax-favored partnership form, they cannot without a heavy tax toll charge.
If a corporation is an S corporation for its first taxable year beginning after December 31, 1996, the accumulated earnings and profits of the corporation as of the beginning of that year will be reduced by the accumulated earnings and profits (if any) accumulated in any taxable year beginning before January 1, 1983, for which the corporation was a subchapter S corporation
. From January 1, 1997, forward, the only amounts reflected in an S corporation's accumulated earnings and profits account will be attributable to the corporation's prior existence as a subchapter C corporation.
While such concerns appear to be without foundation, there can be no assurance that the earnings of businesses conducted in LLC form will not be subjected to some form of additional entity-level taxation by such States as some jurisdictions already do with respect to Subchapter S corporations
. It is certain that the tax executive in a business considering the use of an LLC should investigate the tax situation in each State in which significant operations are likely to be conducted as part of the decisionmaking process.
Mike Kopetski, a first-term Oregon Democrat, wants to increase the shareholder limit on subchapter S corporations
from 35 to 50.
(63) See Joint Committee on Taxation, Law and Proposals Related To Subchapter S Corporations
and Home Office Deductions (JCS-16-95), 5/24/95, Table 3.
As a result, the only firms represented are individual proprietorships, partnerships and Subchapter S corporations
. Many of the larger black Subchapter C corporations were left out of the report altogether, a fact that leaves the validity of the census report open to debate.
"Any hopes have been dashed," he said, "by nex taxes and the potential for additional health care costs." He added, "I just received a notice from a supplier announcing that it had raised prices for the first time in four years specifically because of higher taxes on subchapter S corporations
." He concluded, "The NFIB's growth forecast for the second half of the year might be on the optimistic side."