I sometimes run across small business owners who have set up their business as a corporation, and I often ask why they chose a corporation rather than a limited liability company (or LLC). Sometimes the answer is that the business was incorporated before LLCs existed, or when LLCs were new and the lawyer who advised the owner was not familiar with LLCs or was not comfortable with using them, and that makes sense. Another relatively common answer is that the owner’s lawyer or, more often, accountant advised the owner that there were advantages to being taxed as a Subchapter S corporation rather than being taxed as an LLC, so the business was organized as a corporation rather than a limited liability company. That doesn’t make as much sense, at least not since 1997.
Although the history of LLCs can be traced back to earlier statutes in Germany and other European countries, there were no LLCs in the United States until 1977 when Wyoming passed the first LLC statute in the country. For several years after that, the use of LLCs was suppressed by uncertainty surrounding their status for income tax purposes.
The Internal Revenue Code did not (and still does not) include provisions specifically written for taxing LLCs. The question was whether they would be taxed as partnerships or as corporations, and the answer was not clear. In 1995, the IRS issued guidance identifying four specific attributes Continue Reading