Dear TaxGuru,

I live in NJ and am thnking of forming a Corporation, but I have been told that a LLC is a better vehicle. Is this true, and what advantages do you think that I would have for my flower shop.

Regards

Merryjay

Dear MerryJay,

I think this is GREAT QUESTION and the answer to this generic question without looking into your individual tax circumsatnces is the LLC appears to be a better vehicle going forward in 2007!

There are many reasons however, most of the recent popularity of LLC stems from the fact that the
1. LLC offers more favorable treatment of passing ownership to next generation.

2 .the minimum taxes for 2 member LLC is $300, or $150 for each member, this is less than the minimum corporation tax for NJ Corporation (C or S) which is currently $500. Obviously if you have 5 members in the LLC it would be cheaper to maintain an S Corporation.

3. the cost of formation is about the same, but the formal withdrawal/closing of the LLC is much simpler process and considerably easier.

4. it is said in legal circles that the LLC offers a more robust legal protection, although I am unable to site any legal cases to substantiate that.

5. LLC's avoid double taxation as in the case of a C corporation. To avoid double taxation in the C corporation, you would have to convert to an S corporation, and incur more expenses.

These are but a few advantages there are many books written on LLC's and some issues are very complex to discuss here. But, it appears generally, the public and the business community have choosen the LLC's over C corporation.

Ok, lets say I decide to go for the LLC based on what you are saying regarding potential tax savings etc., how much salary do I have take from my profits?

Does the same argument apply as in the S Corporation as discussed by you, ie concept of reasonable salary etc.?