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How Taxes And Business Entities Work

How Taxes And Business Entities Work

Is there any difference in an LLC or S-Corp when forming an entity and looking at potential tax liability?

When clients inquire on what type of entity should be formed for the operation of a business venture, we refer to that type of discuss ion as “Choice Of Entity”.

Both LLC’s and S-Corp’s have some similarities.

They both offer the following advantages over not incorporating:
• Limited liability: Directors, officers, shareholders/members, and employees enjoy limited liability protection.
• Pass-through taxation: Owners report their share of profit and loss on their individual tax returns.
• Double taxation elimination: Income is not taxed twice (unlike corporate income which is taxed at the corporation level and again then at the individual level as dividend income when distributions are made).
• Investment opportunities: The company can attract investors through the sale of shares of stock or membership interests.
• Perpetual existence: The business continues to exist even if the owner leaves or dies.

The big difference though is how these entities are taxed which people are not aware knowing that for both types of entities, the income or loss flows through to the individual income tax returns of the owners. An S-Corp will follow the corporation tax code. An LLC can follow either the partnership tax code or the corporation tax code or even be taxed as an entity disregarded as separate from its owner.

To answer which tax code is most beneficial, we consider several factors including the type of business being conducted. Real estate ventures are usually better off being subject to the partnership tax code while other types of businesses are usually better off being subject to the corporation tax code.

How the owners are to be compensated or paid back their investment also impact what entity to use. It is common that owners who fund a business over owners who provide sweat equity will demand a priority when any distributions are made. It is also advisable that for owners who render services to the business pick up ordinary income as compensation for the service provided. The choice of entity becomes key to minimize the adverse tax consequences that could otherwise arise if proper planning is not made.

We also consider the ultimate exit strategy of the business in determining what entity to use. Depending on how the business is first going to be capitalized or financed, the exit strategy for the business will have different tax consequences if the entity follows the corporation tax code or the partnership code.

Since the initial choice of entity in most cases cannot subsequently be changed without incurring additional tax liability, you should seek tax counsel BEFORE forming the entity and not waiting until afterwards when it is too late.

Request A Case Evaluation Or Tax Resolution Development Plan

Get a Tax Resolution Development Plan from us first before you attempt to deal with the IRS. There are several options for you to meet or connect with Board Certified Tax Attorney Jeffrey B. Kahn. Jeff will review your situation and go over your options and best strategy to resolve your tax problems. This is more than a mere consultation. You will get the strategy or plan to move forward to resolve your tax problems! Jeff’s office can set up a date and time that is convenient for you. By the end of your Tax Resolution Development Plan Session, if you desire to hire us to implement the strategy or plan, Jeff would quote you our fees and apply in full the session fee paid for the Tax Resolution Development Plan Session.

Types Of Initial Sessions:

Most Popular GoToMeeting Virtual Tax Development Resolution Plan Session
Maximum Duration: 60 minutes - Session
Fee: $350.00 (Credited if hired*)
Requires a computer, laptop, tablet or mobile device compatible with GoToMeeting. Please allow up to a 10-minute window following the appointment time for us to start the meeting. How secure is GoToMeeting? Your sessions are completely private and secure. All of GoToMeetings solutions feature end-to-end Secure Sockets Layer (SSL) and 128-bit Advanced Encryption Standard (AES) encryption. No unencrypted information is ever stored on our system.


Face Time or Standard Telephone Tax Development Resolution Plan Session
Maximum Duration: 60 minutes - Session
Fee: $350.00 (Credited if hired*)
Face Time requires an Apple device. Please allow up to a 10-minute window following the appointment time for us to get in contact with you. If you are located outside the U.S. please call us at the appointed time.


Reduced Fee Face-To-Face Tax Development Resolution Plan Session (Irvine Office Only)
Maximum Duration: 60 minutes - Session
Fee: $350.00 (Credited if hired*)
Session is held at our main office. 15615 Alton Parkway, Suite 450, Irvine, CA 92618.


Standard Fee Face-To-Face Tax Development Resolution Plan Session (Any Location Outside Our Irvine Office)
Maximum Duration: 60 minutes - Session
Fee: $600.00 (Credited if hired*)
Session is held at any of our offices outside our Irvine office or any other location you designate such as your financial adviser’s office or your accountant’s office, your place of business or your residence.


Jeff’s office can take your credit card information to charge the session fee which secures your session.

* The session fee is non-refundable and any allotted duration of time unused is not refunded; however, the full session fee will be applied as a credit toward future service if you choose to engage our firm.