Either entity choice is fine.
If an S corporation is formed, there may be tax problems with taking assets out of the corporate form because the subchapter C provisions applicable to distributions of property by a corporation also apply to S corporations. Thus, if appreciated property is distributed, a gain will be recognized by the corporation.* Although there will be no corporate-level tax imposed, Joe will be required to report the gain as a flow-through item, and the gain may be reported earlier than was intended.
all states permit single owner LLCs, and you should consider an LLC as the ownership form. Regulations §301.7701-3(b)(1)(ii) states that a single member unincorporated entity will be disregarded for tax purposes, unless it elects, under Regulations §301.7701-3(c), to be an association.
Because single member LLCs operating a business will now be taxed as either a sole proprietorship (if the single owner is an individual) or a division (if the single owner is a corporation), taxpayers should consider the LLC as an alternative to an S corporation. The owner may then obtain the benefit of limited liability while avoiding the problems with exiting the S corporate form.
S corporations have historically been a haven for one-owner businesses desiring the liability shield not offered in a sole proprietorship. In fact, more than half of all S corporations have only one owner. Some commentators suggest that the IRS policy of allowing an entity to be a partnership for tax purposes by simply declaring that it is a partnership will be the death of S corporations. However, most S corporations are formed by one owner, and the LLC form was once unavailable to a single owner business. |
