In determining your choice of business entity, you should keep in mind the following disadvantages to the use of an LLC: In the legal/tax arena the forming and operating of an LLC is more uncertain because of the lack of guidance from established case law and regulations. This may be more theoretical than real. Although we are primarily concerned with Georgia law a recent trend is to form the business entity in other “friendlier” jurisdiction. Other states may not recognize all of the rights and privileges afforded to an LLC in Georgia. If the LLC has one or more members who are non-residents of the LLC state, it must file a list of members and consents with its annual state tax return. In some jurisdiction when a non-resident member fails to consent to the forming state’s tax jurisdiction, the LLC must pay the tax attributable to the non-consenting member's distributive share of LLC income. Finally, the members of an LLC may have implied authority to act on behalf of the LLC and bind the LLC, e.g. signing of deed of trust (mortgage). Consequently, as emphasized last month, your operating agreement is very important and should be considered carefully

The “C” Corporation: We have already discussed the S Corporation and its pass through benefits and discussed the JGTRRA and how it still requires one to consider both the C and S Corporation with their separate and distinct advantages/disadvantages. If anything, JGTRRA has forced the professionals to examine the choice of the S versus the C more carefully. Now we will spend our time on the C versus the LLC.

Looking first to the disadvantages of an LLC Relative to "C" Corporation one must consider the issues of retained earnings and fringe benefits.

1. Retained Earnings. If your business intends or may retain substantial earnings you may prefer the corporate structure. However, with the JGTRRA changes one must carefully consider and weigh the options and consequences. Additionally you should consider and study the projections for your entity and calculate the pro forma after-tax performance before making a decision.

2. Fringe Benefits. For an investor starting and expecting a business to continue in existence as opposed to being a single project the issue of fringe benefits can be controlling. An LLC taxed as a partnership cannot provide many of the fringe benefits that a "C" Corporation can. Members are not "employees" for purposes of the fringe benefit rules. See, e.g., IRC 5105(9) relating to accident and health care plans and IRC #79 relating to group term life insurance. If the LLC provides members with fringe benefits, the cost must be included in the member's gross income. Some states also allow more favorable retirement plans/benefits for C’s so you must check your state of origin carefully.

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