When starting a business enterprise, one of the most significant and important decisions to make is the choice regarding the legal form to use in operating the business. The alternatives include sole proprietorship, partnership, corporation (C corporation), S corporation, and limited liability company (LLC). Startup business owners must consider the legal and tax considerations associated with selecting a particular type of business structure. This is the first part of a series of blogs on the tax treatment of business entities.
Unlike corporations which are treated as separate tax entities, the IRS and the Tax Code treat LLCs as “pass-through” entities. Thus, an LLC or “Limited Liability Company” is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The IRS treats an LLC like a sole proprietorship or a partnership, depending on the number of members.
Christine C. Peterson, et al. v. Commissioner of IRS – Retirement Payments May Be Deferred Compensation
In a case of first impression, the Eleventh Circuit Court of Appeals held that payments from a Mary Kay retirement program to one of its retired salespersons were earnings subject to self-employment tax. This holding was based upon the fact that the plan under which the payments had been made was amended by Mary Kay to comply with the new tax rules under I.R.C. § 409A. (Peterson v. Commissioner No. 14-15773 (11th Cir. May 24, 2016). The IRS considered the payments as nonqualified deferred income from a § 409A plan, therefore subject to the provisions of § 409A, and assessed the Petersons a hefty bill for unpaid self-employment tax.