4 Pitfalls of LLCs Choosing S Corp Elections.
Despite, the allure of combining the flexibility of an LLC, with the formal structure and tax benefits that an S Corp election brings, the very real danger of achieving none of the above, is possible, when an LLC chooses S Corp election.
1. More formalities.Amending the LLC operating agreement, and creating a complicated internal affairs governance framework, may lead to more not less, corporate formalities.
2. Trigger tax audit, if transition isn't planned properly.The number of tax forms, and procedures to follow to make this entity structure, leaves a lot of room for error for the unwary, which could make the business more likely to face the scrutiny of tax authorities.
3. Change in state law could cause S Corp treatment to be lost.Currently, there is a wave of changes happening in the LLC law at the state level, due to a number of trends, such as, attempts to uniform LLC laws through RULLCA by some states, attempts to copy Delaware LLC law by others, and yet defiance by many states to keep their LLC laws as is, while putting their own unique spins to adopt with the changing of the times. This creates a very real possibility for an LLC law change, to frustrate even the most well drafted operating agreement, which in turn, could cause its S Corp election to be lost, due to failing to meet one or more of its ongoing requirements.
4. End up with a higher tax bill.There are certain aspects, where an LLC may be better for tax purposes, without an S Corp election, and the change could cause higher not less taxes.