by Mike Tucker, CPA
I bought a real estate franchise last year and put it under the S Corporation that I had for my other business ventures. I now would like to separate the real estate franchise from the other businesses. Would it be best if I set it up as another S Corporation or as an LLC?
Although your question does not ask for an opinion on how to transfer the asset, I would be remiss if I did not address it in passing.
You should exercise caution in how you accomplish the transfer. It could be a taxable event. For example, if the transfer were accomplished as the distribution of appreciated property, the gain would be taxable. There are means by which the asset transfer could be non-taxable as part of a “spin off” or “split up” of your S Corp. This can be a very complicated task, and you should obtain the advice of competent legal and accounting counsel.
With that out of the way, we can now address your question of which business entity might be more advantageous for you.
The greatest caveat for you, however, may be that California does not recognize some LLC entities. As a rule of thumb, if there is a license required to operate (for example, accountants, attorneys and real estate), California will not allow LLC status.
Therefore, it appears that you are left with the S Corp. form of entity.
There are many differences in the rules under which S Corporations must operate that do not affect LLCs.
Following is a partial list.
- S Corps. are limited to 75 shareholders. There are no restrictions on the number of members of an LLC.
- S Corps. are limited to a single class of stock. LLCs may have multiple classes.
- S Corps. cannot have a shareholder that is a corporation, partnership, or LLC (among others). An LLC can have any form of entity as a member.
- S Corps. shareholders cannot include in basis the company’s indebtedness. LLC members can.
- Some states (California included) do not recognize, to the fullest extent, S Corps. status. For example, in California S Corps. are taxed at 1.5 percent. LLCs must pay a fee based on gross receipts.
Mike Tucker is a San Jose, Calif., CPA, with the firm of Just, Gurr & Associates. You can reach him at (408) 271-2700.
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