THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Monday, November 21, 1994 TAG: 9411190662
SECTION: BUSINESS WEEKLY PAGE: 4 EDITION: FINAL
SOURCE: BY CHARLES V. MCPHILLIPS, SPECIAL TO BUSINESS WEEKLY
LENGTH: Medium: 56 lines
When investors and business owners consider the largest impediment to the formation of capital, or the gain to be realized by investing it, they inevitably turn to the issue of corporate taxes.
Federal income tax rates can rise as high as 39 percent, while Virginia taxes profits at the rate of 6 percent.
Moreover, the remaining profits are taxed yet again when they are distributed to shareholders as dividends, or as proceeds upon the sale of the business.
OPINION
Seeking relief, many Virginia businesses favor a fairly new form of doing business known as the limited liability company.
Business owners and investors have registered more than 4,800 LLCs in Virginia.
LLCs offer their owners (the members) limited liability for company debts in the same way that corporations protect their shareholders, but like partnerships, LLCs do not pay income taxes themselves: Only the members pay tax on the profits of the business.
By eliminating the layer of corporate tax on its profits, a business can more readily accumulate capital for expansion, and investors can look forward to preserving a much greater share of the capital gain, if any, generated by their investment.
S corporations are a well-known alternative. For many years, some corporations have made S elections to avoid tax at the entity level in favor of a single tax at the ownership level.
However, S corporations are handicapped. Only individuals and some qualifying trusts may hold shares in an S corporation.
S corporations may not have more than 35 shareholders, and nonresident aliens are excluded from ownership. Except as to voting rights, S corporations cannot have more than one class of stock, a rule which snags many ventures that offer preferred returns to some investors and subordinated pay-outs to others. Finally, S corporations cannot have wholly-owned subsidiaries.
LLCs can pass through to their owners start-up losses and other tax benefits (such as depreciation), which the owners may be able to exploit as deductions against other taxable income. These deductions may prove more difficult to claim with S corporations.
Limited partnerships have long been an option, but they require at least one general partner who must accept unlimited personal liability for the partnership's debts. Also, a limited partner who participates actively in the business can risk being reclassified as a general partner, thereby becoming liable for the partnership's obligations. MEMO: Charle V. McPhillips is a Norfolk lawyer.
by CNB