Fringe Benefits

April 13, 2006

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When comparing the two entity forms, and their tax implications, on the surface the corporation enjoys a slight advantage over the LLC when it comes to providing certain tax-free fringe benefits to its owners.

For example, this includes company-paid life insurance (to $50,000), 100 percent of health insurance, and dependent care assistance. However, this advantage only exists with a regular C corporation. It does not apply to subchapter S corporations.

Any owner of a 2-percent-or-more interest in a subchapter S corporation is treated the same as an LLC owner and, thus, enjoys no advantages at all over the LLC owner.

The good news is that the most important fringe benefit of all, tax-deductible health insurance, has been phased-in and is now deductible for LLC owners and S corporation owners, as well as sole proprietors and partners, under federal law.

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In recent years, LLC owners, other self-employed individuals, and 2-percent-or-more owners of subchapter S corporations have been able to deduct only a portion of health insurance premiums. Deducting the cost is the same, in outcome, as not reporting the cost as income in the first place.

In 2003, the deductible amount went up to 100 percent. Now, these individuals will be able to deduct 100 percent of the cost, making health insurance a tax-free benefit to these owners as well.

Where providing fringe benefits to the owner and his or her family is an important issue, consideration should be given to forming the operating entity as a statutory close corporation in Nevada, or one of the other states that offer the special statutory close corporation forms.

Another simple alternative would be to elect to have the LLC taxed as a corporation.

Because the LLC can elect to be taxed as a corporation, it can, in this way, achieve the same benefits enjoyed by corporations. Because of all the tax advantages, LLC owners almost never make this election. Simply put, the benefits achieved by this election usually would be small, especially in comparison to the cost. However, for those small business owners interested in providing the extra tax-free fringe benefits, this election may be preferable to forming a corporation. After all, the LLC offers better protection for the business owner's interest against the claims of his personal creditors. This is a significant protection. It is not available even in the statutory close corporation, which, in other respects, resembles the LLC.