Check-the-Box Regulations Signal a White Flag

This is really a strange problem when you think about it. Years ago, when the income tax laws in the US were first developed, there were two types of business entities, i.e. corporations and partnerships. When new types of entities came into existence, rather than creating a new law to specifically deal with the new type of entity, the IRS would try to determine if the entity was more corporate like or more partnership like. For tax purposes, it would be forced into one hole or the other.

This process was not simply true for U.S. business entities, but for any business entity which might be liable for US taxes. Some tax haven countries would invent entities with certain characteristics simply to achieve a certain type of U.S. tax result. One such entity was the Limited Duration Company. This type of entity would have a specified life-span. Since corporations have potentially perpetual life, a limited life span would make it more like a partnership, and hopefully avoid U.S. taxation at the entity level.

In the early 1970, the state of Wyoming first enacted a law creating a new type of entity, the Limited Liability Company. The problem was that to maintain a corporation's identity as a separate legal person the shareholders are required to follow several formalities. Certain meetings must be held, votes taken, documents produced, corporate offices filled. For the small business person much of this seemed ridiculous.

Imagine running a small business with two shareholders, who really operates the business by themselves. Are they really going to sit down together each year and hold a meeting? Why should she have to ask relatives or neighbors to fill certain officer posts, when those people have no connection to the business. If all of these formalities are not followed, they will lose her limited liability protection. This all become even more absurd when there is only one shareholder/operator of a business.

The Wyoming legislature wanted to allow two of more people to operate a business with limited liability protection, but without all of the formalities. Thus they created LLCs. Today most states have created or are moving to single member LLCs, as well. In addition to the U.S., many countries around the world have created entities like LLCs. Despite this incredible increase in the popularity of LLCs and similar entities, the U.S. Congress has not created tax laws specific to these entities. Rather, for years the I.R.S. was left to argue over whether a particular entity was more corporate like or more partnership like.

Finally, being overwhelmed by the sheer number of LLCs involved, the I.R.S. raised the white flag and issued new regulations, which became effective on January 1, 1997. By following the regulations the members of an LLC can chose how they are to be taxed. They can be taxed as a partnership or a corporation. If no election is made to be taxed as a corporation, the LLC will be taxed like a partnership.

		February 21, 2005 *Check-the-Box Regulations Signal a White Flag*
	This is really a strange problem when you think about it. Years ago, when the income tax laws in the US were first developed, there were two types of business entities, i.e. corporations and partnerships. When new types of entities came into existence, rather than creating a new law to specifically deal with the new type of entity, the IRS would try to determine if the entity was more corporate like or more partnership like. For tax purposes, it would be forced into one hole or the other. This process was not simply true for U.S. business entities, but for any business entity which might be liable for US taxes. Some tax haven countries would invent entities with certain characteristics simply to achieve a certain type of U.S. tax result. One such entity was the Limited Duration Company. This type of entity would have a specified life-span. Since corporations have potentially perpetual life, a limited life span would make it more like a partnership, and hopefully avoid U.S. taxation at the entity level. In the early 1970, the state of Wyoming first enacted a law creating a new type of entity, the Limited Liability Company. The problem was that to maintain a corporation's identity as a separate legal person the shareholders are required to follow several formalities. Certain meetings must be held, votes taken, documents produced, corporate offices filled. For the small business person much of this seemed ridiculous. Imagine running a small business with two shareholders, who really operates the business by themselves. Are they really going to sit down together each year and hold a meeting? Why should she have to ask relatives or neighbors to fill certain officer posts, when those people have no connection to the business. If all of these formalities are not followed, they will lose her limited liability protection. This all become even more absurd when there is only one shareholder/operator of a business. The Wyoming legislature wanted to allow two of more people to operate a business with limited liability protection, but without all of the formalities. Thus they created LLCs. Today most states have created or are moving to single member LLCs, as well. In addition to the U.S., many countries around the world have created entities like LLCs. Despite this incredible increase in the popularity of LLCs and similar entities, the U.S. Congress has not created tax laws specific to these entities. Rather, for years the I.R.S. was left to argue over whether a particular entity was more corporate like or more partnership like. Finally, being overwhelmed by the sheer number of LLCs involved, the I.R.S. raised the white flag and issued new regulations, which became effective on January 1, 1997. By following the regulations the members of an LLC can chose how they are to be taxed. They can be taxed as a partnership or a corporation. If no election is made to be taxed as a corporation, the LLC will be taxed like a partnership.