LLCs as S Corporations? Why?

I have heard CPAs on more than one occasion recommend a client form a state law limited liability company, check the box to be taxed for federal income tax purposes as a corporation, and then make an S election.  The reason–according to the CPAs, less burdensome corporate paperwork–no need to keep minutes, bylaws, etc!  

I disagree that this is less complex.  

It is clearly possible for a state law limited liability company to elect to be taxed as a corporation and then make an S corporation election (if the entity otherwise qualifies to make such an election).  The question is–why?  I can imagine a few good reasons, but none of them include reducing the need for minutes or otherwise standard record keeping, or the burdens of needing bylaws.  

The somewhat decent arguments I can imagine for this contorted choice of entity are:

  • The applicable state limited liability company statute is more favorable than the applicable state corporate statute.
  • Perhaps, for example, because the state law on limiting the liability of the managers of the LLC is more favorable than the state law limiting the liability of directors and officers of the corporation.
  • Or perhaps because the state law with respect to the governance of the LLC is more favorable than the state law with respect to the governance of the corporation.

In the author’s opinion, whatever is to be gained in these regards is overshadowed by the complexity of the set up, and the confusion that it is likely to generate in future due diligence questions.  In most if not all cases the author believes that this choice of entity is likely to be more trouble than it is worth.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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