Tax Comparison Between S Corporations and
A. FEDERAL INCOME TAX ADVANTAGES OF
SUBCHAPTER K (Partnerships) COMPARED TO SUBCHAPTER S
1) There are no
eligibility or election requirements to meet in order
to take advantage of Subchapter K for partnership tax
treatment.. Corporations must meet onerous
requirements to qualify for Subchapter S tax treatment.
2) Subchapter K can
provide for special allocations (Section 704(a)) among partners.
Subchapter S requires each shareholder to be treated the same
eliminating some tax planning strategies.
3) Under Subchapter
K, partnership basis may be included in the
partners' bases in their partnership interests. Shareholders of S
corporations can only include in the basis of their stock amounts they
to their corporation.
4) Distributions of
assets from Subchapter K are generally tax-free.
Distributions of assets from S corporations are treated as sales of
assets and can trigger gain or loss.
5) When a partnership
redeems a partner, the other partners get an
inside basis step-up. When an S corporation redeems a shareholder,
no inside basis step-up at the corporate level.
6) When partners sell
their partnership interest to other partners or to
third parties, the buyers get inside basis step-ups. When shareholders
corporations sell their stock to other shareholders or to third
partnerships, the buyers don't get inside basis step-ups.
7) Partnerships can
grant partnership interests to existing and new
partners in exchange for past or future services. S corporations cannot.
B. FEDERAL INCOME TAX DISADVANTAGES OF
SUBCHAPTER K AS COMPARED WITH
1) Sales of interests
in partnerships can trigger ordinary income
treatment for the sellers with respect to ordinary income assets. Not
for sales of Subchapter S stock.
contractual arrangements-e.g., concerning options to
purchase partnership interests and grants of restricted partnership
interests-can involve complex and expensive specialized drafting and
raise issues to which there is no clear answer. S corporation grants of
stock options and restricted stock don't usually involve complex
C.REASONS TO FILE AS A LLC BUT TO BE TAXED
AS S CORPORATION
An LLC taxed as an S corp is same as a straight S corp. In addition to
being a shareholder, the owner-officer of an S corp who performs
services on behalf of the S corp is considered to be an employee of the
S corp. Click
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