Magazine article The CPA Journal

Federal Payroll Rules: One Reason Not to Form an LLC

Magazine article The CPA Journal

Federal Payroll Rules: One Reason Not to Form an LLC

Article excerpt

Prior to the widespread enactment of Limited Liability Company (LLC) statutes by almost every state legislature, taxpayers operating as partnerships were likely to be either real estate owners or professional service businesses such as accountants, attorneys, and entertainment ventures. Due to the unlimited liability feature of a partnership, it was uncommon for a commercial business-whether it be a manufacturer, wholesaler, or retailer-to operate as a partnership despite the poten tial for double taxation as corporation.

Many new entities are being created as LLCs. In addition, some LLCs have been formed from the conversion of corporate entities even though, in many situations, the conversion cannot be accomplished tax free. In the near future, we will likely have clients operating as LLCs in a variety of businesses and industries. Unless improperly structured, an LLC is taxed as a partnership.

There are two important payroll matters to consider for both a corporation converting to LLC status as well as a new entity being formed as an LLC. First, partners are not usually employees of a partnership (Rev. …

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