The limited liability company (LLC) can be a particularly attractive form of business entity for start-up founders, especially where tax advantages are of primary concern.  Notwithstanding their “pass-through” tax advantage, LLCs do not hold all the cards.  This article considers two unique advantages available to subchapter-C corporations that are not available to LLCs taxed as partnerships.

Self-Employment Advantage  

Members of an LLC taxed as a partnership run the risk that the Internal Revenue Service will deem distributions to members that are also employees of the LLC as subject to self-employment tax, even if the member receives separate W-2 wages.  This risk is greatest in the context of LLCs that provide services through the member-employee.  Corporate shareholders, in contrast, may be both a shareholder and employee of the corporation without the same risk.  Corporate shareholders should be mindful, however, that income from the corporation received as an employee in excess of the employee’s reported W-2 wages are treated as dividends not deductible by the corporation and taxed at both the corporate and shareholder level.

Qualified Small Business Stock

Shareholders of eligible subchapter-C corporations may be able to exclude 100% of the gain they recognize on the sale of qualified small business stock (QSBS) under Section 1202 of the Internal Revenue Code (the “Code”).  The exemption is limited to the greater of $10 million or ten times the aggregate adjusted basis of the stock at the time it was issued.  While eligibility rules for the exclusion are complex, in general, eligible shareholders (1) are all non-corporate shareholders, though, not all partnerships will qualify for the full benefit; (2) have held the stock for more than five years; and (3) received their stock as an original issuance after August 10, 1993.  Eligible corporations, generally, (1) include most (but not all) subchapter-C corporations and LLCs taxed as a C-corporation; (2) have not had more than $50 million of tax basis in assets at any time between August 11, 1993 through the instance the stock is issued (eligibility is not destroyed if tax basis exceeds $50 million at a later date with respect to such stock); (3) must not have made any “significant” redemptions of stock in the year preceding or following the sale; (4) must not be a business listed in Section 1202(e)(3) of the Code; and (5) must use 80% or more of its assets (by value) in the active conduct of its business.  For more information, please contact Jeffrey L. Volpintesta (, Robert L. Teicher ( or another BW attorney.

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