TagS Corp

Is Your Compensation Reasonable?

Commercial_lending-webBy Amanda Wilson

If you are an employee of a company for which you are also an owner, you should consider reviewing your current compensation for its reasonableness.  It is very common for small businesses to be formed as Subchapter S corporations.  In these types of business, owners are also often employees of the business.   The owners may be willing to take a smaller salary because they will eventually receive the business profits anyway.  If this describes your business, be careful.  The Internal Revenue Service continues to focus on whether compensation paid to employee owners is fair and reasonable when auditing small businesses, particularly S corporations.

Can or Should an LLC be a Shareholder of an S Corporation?

By: Amanda Wilson

Many private companies utilize S corporations in their ownership structure, as they provide beneficial tax treatment. In order to qualify as an S corporation, the corporation can have only certain types of shareholders. Specifically, a partnership cannot be a shareholder. Yesterday, someone asked me whether a single member LLC could be a shareholder. The answer should be yes, as the LLC is treated as though it does not exist for tax purposes. Private guidance indicates that the IRS agrees with this answer.

The bigger question, though, is whether an LLC should be a shareholder of an S corporation. My answer to that is generally no. Initially, the LLC only has one owner, so it does not exist for tax purposes. The problem is that, as time passes, memories fade and the owner of the LLC may forget that he must be the only owner. He may transfer some of his LLC interest to his spouse, or make a gift to one of his kids. Suddenly, the LLC springs into existence as a partnership for tax purposes. The result? The corporation loses its status as an S corporation for at least 5 years. All the careful tax planning and structuring has been undone.

For this reason, using a single member LLC to own stock in an S corporation, while probably permissible, is not usually a good idea. The normal benefit of using a single member LLC, which is to shield the owner from liabilities associated with the assets held by that LLC, is not necessary. The S corporation itself provides that liability protection. More simply, using an LLC introduces significant tax risk, and provides no real benefit.

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