Also, an S Corporation may unintentionally convert to a C corporation if there is a transfer of stock to a non qualifying stockholder. Finally, S Corporations can have only one share of stock and so cannot allocate income to shareholders upon the sale of an appreciated asset except on the basis of stock ownership. But a partnership or LLC may be able to make special allocations based on other economic facts. To satisfy IRS tax rules for the definition of an LLC, the LLC must lack certain corporate characteristics. The attorney will usually accomplish this by avoiding continuity of life and free transferability of interests.
Partnership is a third alternative to LLCs and corporations.
General liability of all partners, which may require unacceptable insurance costs, is the major negative to general partnerships. Limited partnerships must have at least one general partner subject to personal liability and the limited partners can lose their limited liability protection if they are too involved in the management of the partnership. Therefore, to have the best of all three worlds, limited liability, insurance savings and tax protection, the LLC will increasingly be preferred over corporations and partnerships. The costs of creation and maintenance should be generally similar to or less than for corporations. This article is printed courtesy of the West San Gabriel Valley Association of Realtors, for whom Merrill W. Francis is legal counsel.