Here is a follow up by tax expert Mitch Reitman.  It's a bit complex so letme simplify it.  The preferred entitly for conducting your alarm businessis a sub chapter S corporation.  If your accountant or tax attorneyrecommends anything else, show them this email.


Ken,

Lilianne is correct.  I recently picked up a client that was a CaliforniaLLC.  How this got past the California Bureau of Consumer Affairs I don'tknow.  This is a good example of why you should use professionals thatunderstand the alarm industry.  They were a partnership and had to convertto an S Corporation which posed some additional challenges.

A few things to note about a LLC from a tax perspective.  Remember theseare not legal issues, simply Federal tax treatment issues.  An LLC can betaxed three different ways.

A LLC can be taxed as a C Corporation (if the members formally elect thistreatment).  This is rarely if ever a good idea and I have never seen aclosely held alarm company do this.  Remember, this does not make the LLC acorporation, it only taxes it as one.

 1. A LLC with more than one member is taxed as a partnership.  This is the    typical tax treatment of a LLC.  Partnership taxation can be tricky,    especially if majority partners leave.  The most common reason for    multiple entities to form an LLC as opposed to a Corporation as that a    Corporation or LLC can be a member of another LLC, while Subchapter S    Corporation stockholders generally must be individuals or trusts. 

2. A LLC with one member is taxed as a sole proprietorship.  The owner    would not file a separate tax return for the LLC.  The tax form would    be a Schedule C attached to the owner's personal tax return.    Contrary to popular belief, a single member LLC cannot file a    partnership tax return (Form 1065) as a partnership must have at least    two members.  I have actually seen an instance in which a tax preparer    has filed 1065's for a single member LLC.

I strongly discourage my clients from forming LLC's as opposed to SCorporation.  The 2004 tax law lifted many of the restrictions  on Scorporations (raised the number of shareholders to 100, etc..) and otherrecent tax changes allow owners to deduct their personal health insuranceexpense.  An S Corporation may repeat may be able to issue non-voting stockas long as the only difference between the classes of stock is votingrights (check with your tax advisor prior to doing this as violating the SCorporation rules may automatically revoke the S Election resulting inautomatic C Corporation status).  This is especially useful for a businessowner that wants to provide some equity to employees or others, but doesnot wish them to be able to vote on corporate affairs.

I also discourage single member LLC's for another reason.  This is puresupposition but it is well grounded.  The IRS uses many methods to selectaudit targets, one of which is DIF scoring.  While the IRS is vague as tohow DIF scoring works, they have agreed that it matches tax returns ofindividuals and entities with similar characteristics and compares lineitems of their tax returns in order to detect fluctuations.  A small alarmcompany with gross revenue of $700,000 and net income of $650,000 would bein the top percentages of sole proprietorships and stand out from thecrowd.  That same company would reflect an average S Corporation.Most CPA's do not understand the value of recurring monthly revenue to analarm company.  I testify as to valuations in divorces, and partnerdisputes across the country and the opposing CPA's are clueless.  Thetaxation on the sale of RMR by a C corporation can approach 50% on acorporate and personal level.  Most CPA's only know their clients bytheir tax returns and have no idea that this huge intangible asset is outthere.  The conversion from a C Corporation to an S Corporation (for anexisting corp) is complicated and the tax benefits on a sale may not beavailable until ten years have passed.

 Mitch Reitman

S.I.C. Consulting, Inc.

307 West Seventh Street

17th Floor

Fort Worth, TX 76102

817-698-9999

WWW.SICC.US