Business Formation

If your S Corporation hasn’t been profitable in recent years, simplifying your structure may make sense. Whether to convert or dissolve depends on your goals and state rules.

If the entity is clean and you want continuity (same EIN, bank accounts, and contracts), a legal conversion from S Corp to LLC is typically the smoother route. However, if the business has old liabilities, inactive operations, or you want a fresh start, dissolving the S Corp and forming a new LLC can be more practical.

Either option should be reviewed with your CPA and legal advisor to ensure compliance with both state filing requirements and IRS entity classification rules.

First, congratulations on your decision to form your own practice!

To answer your question, I will make a few comments.

First, a PLLC and an LLC are both creatures (creations) of state law. I practice as a CPA in Texas, so I cannot speak to Washington state law. From my experience in Texas, if you have a license (such as a CPA license), you are required to form a PLLC instead of an LLC (if you choose to operate through a limited liability company).

Second, from a federal income tax perspective, there is no difference in federal income tax treatment between a PLLC and an LLC. Why? Because for federal income tax purposes, there are generally only four (4) ways to get taxed – as a disregarded entity, partnership, C corporation, or S corporation. If you will be the sole owner of the company, your choices are really disregarded entity, C corporation, or S corporation. You can’t have a partnership with just one partner.

Third, I think you’re asking which is better (a PLLC or an LLC) in terms of federal income tax treatment. If that is your question, then they are treated the same. Again, the actual federal income tax treatment depends on how to choose to treat it – going back to the four choices I listed above. So the treatment doesn’t depend on whether it’s a PLLC or LLC.

I hope that answers your question. Feel free to contact me if you wish to engage me to help.

Daniel, good question. To answer your question, I will make two comments.

First, because your son is underage, you should put just your information as the responsible party on the Form SS-4 (Application for Employer Identification Number) or its online equivalent on the IRS’ website.

Second, I think your question reveals some confusion. On the Form SS-4 (or its online equivalent on the IRS’ website), you should indicate that there will be two LLC members (you and your son). After filing the Form SS-4, if you take no further action to elect to treat the LLC differently for federal income tax purposes, then the LLC will be treated as a partnership for federal income tax purposes (because you told the IRS on the Form SS-4 or its equivalent that there will be 2 LLC members). If you want to treat the LLC as something other than a partnership (such as a C corporation or an S corporation), you cannot accomplish that goal just by filing the Form SS-4 or its equivalent. That would take a second step with a different form.

I hope that helps. Feel free to contact me if you wish to engage me to help. Even though I practice as a CPA in Texas, I have clients in other states.

If we are going to use exact terminology, an LLC taxed for federal income tax purposes cannot have “retained earnings.” Retained earnings is a term used in the context of a C corporation or S corporation.

You are correct that an LLC is a pass-through entity (assuming that it’s taxed for federal income tax purposes as a disregarded entity, partnership, or S corporation). If the LLC is taxed for federal income tax purposes as a pass-through entity, then, yes, owners will pay tax on their percentage, regardless of whether it’s reinvested, left untouched in members’ capital, or distributed to owners.

Feel free to contact me if you wish to engage me to help with anything. Even though I practice as a CPA in Texas, I have clients in other states, as I do multi-state returns.

As a CPA, I came across this website and joined just last week, and I just came across your question.

I agree with your attorney wholeheartedly that you should talk with a CPA about your specific circumstances (and the specific circumstances of the other potential LLC member) in order to plan the best way to structure the business for tax purposes. Also, in making that decision, it’s important to consider what you plan to do with the business. Keep in mind that an LLC is a creation or creature of state law. How it is treated for federal income tax purposes is a completely separate matter. Because two of you are involved, you are correct that (for federal income tax purposes), the LLC can be treated as a partnership, C-corporation, or S-corporation. Making the Subchapter S election is how you elect to treat an LLC as an S corporation, so a Subchapter S election is not a fourth type of entity/choice.

In all honesty, the issue of entity election that you are raising is one that is extremely fact-specific, so you really should engage a CPA to listen to your situation and advise you. Feel free to check out my profile on this website as well as Google reviews and please feel free to contact me, if you wish to engage me to help navigate you through the issue at hand.