[Congressional Record (Bound Edition), Volume 151 (2005), Part 5]
[Extensions of Remarks]
[Pages 6161-6162]
[From the U.S. Government Publishing Office, www.gpo.gov]




               SMALL BUSINESS TAX FLEXIBILITY ACT OF 2005

                                 ______
                                 

                           HON. BARBARA CUBIN

                               of wyoming

                    in the house of representatives

                        Tuesday, April 12, 2005

  Mrs. CUBIN. Mr. Speaker, one of the most important decisions for the 
founder of a business is ``choice-of-entity,'' or the decision to 
operate as a corporation, partnership, limited liability company (LLC), 
or other form of business.
  The law regarding choice-of-entity has changed enormously in the last 
15 years, particularly with the widespread adoption of laws authorizing 
the creation of the LLC. As a result, many small business owners have 
more ``choice of entity'' flexibility than ever before.
  First authorized in Wyoming in 1977, LLCs are organized under State 
law, and are now recognized in all 50 states. In essence, LLCs are 
allowed corporate treatment for local law purposes and partnership 
treatment for Federal income tax purpose. LLCs also provide for more 
than one class of ownership, allowing for increased flexibility to 
allocate income or

[[Page 6162]]

losses to different investors. The flexibility and protections of the 
LLC has led to a rapid expansion in the number of small businesses 
electing to operate in this manner.
  In 1995, the Internal Revenue Service (IRS) adopted the position that 
general partnerships could be converted into LLCs with little or no tax 
effects. Unfortunately, as incorporated entities, this does not hold 
true for small businesses operated as subchapter S corporations (S 
Corps).
  Created in 1958, the S Corp structure allows for no more than 75 
shareholders, can issue only one class of stock, and cannot have 
partnerships or corporations as shareholders. Yet, until the rise of 
the LLC, the S Corp structure provided, for all practical purposes, the 
only way that a small business could enjoy the corporate protections of 
limited liability without being burdened with corporate taxation. Taxed 
much the same way as partnerships, many older, family-owned, small 
businesses operate as S corps.
  Clearly, the original intent for creating the S Corp structure was 
the same reasoning that led to the creation of LLCs--to provide a 
simple and flexible tax category for small and family-owned businesses. 
However, despite the similarities to LLCs, S Corps are not granted the 
same conversion flexibility as other partnership-like entities and are 
instead grouped with larger companies under a cumbersome corporate 
structure. My bill would modernize the tax treatment of S Corps, 
allowing them the same choice-of-entity flexibility offered to other 
small businesses operating as LLCs. This is a common sense change that 
is overdue.

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