Capital Stock Tax and Limited Liability Companies: Avoid Unnecessary Taxes with a Family Limited Partnership
By Scott P. Borsack
Some folks who attended one of our seminars have either begun the planning process themselves, or know someone who has. A number of these individuals have either used or are contemplating the use of a limited liability company. That of course leads to questions because as you know I am a big fan of the limited partnership for gifting and do not favor the limited liability company in Pennsylvania. My reason for the choice is rather simple – taxes. In Pennsylvania limited partnerships face fewer taxes than do limited liability companies. In particular, under Pennsylvania law limited liability companies must file a return for and pay the Capital Stock Tax. This is nothing new. Since 1995 limited liability companies in Pennsylvania have had to pay this tax. So why would Pennsylvania landowners use limited liability companies and pay a tax each year that they could avoid by using a limited partnership, you ask? That is a very good question. It is one that I put to landowners to ask to their professional advisors who have recommended the use of limited liability companies.
It is true that the Capital Stock Tax is presently slated to expire in 2014. It was also scheduled to expire in 2010, as well as years prior. At this point, with the dire financial circumstances which lawmakers and the governor face in Harrisburg (and many other state capitols for that matter) it is not likely that the Capital Stock Tax will expire any time soon. I fully expect that as the next "sunset" approaches, the Capital Stock Tax will again be extended. So do not count on the expiration of the tax as the justification for the use of a limited liability company. This tax seems to have more lives than cat. You cannot ignore it.
If the Capital Stock Tax were not significant, maybe I would think otherwise. Unfortunately, it is a very significant tax. Lets assume that you have 80 acres of land which is leased to an exploration company. In 2010 you created a limited liability company and transferred your land by deed to the limited liability company. Ignore for the moment that the transfer by deed is yet another mistake. With 80 acres the exploration company could put one well on your property.
In 2011 you start receiving royalties from the exploration company. Based upon current production models developed by geologists, which I fully expect to change in the coming months based upon information released recently by the state Department of Environmental Protection, over the first ten years you could expect to pay more than $100,000 in needless taxes. Set out below is a table which charts the Capital Stock Tax for the first 10 years of production. Compared to the royalties, the taxes are not significant. This still represents more than $100,000 in taxes that could have been completely avoided.
Year Royalties Tax
1 $455,813 $17,704
2 $214,951 $14,050
3 $160,053 $12,276
4 $133,868 $11,191
5 $120,160 $10,457
6 $112,758 $8,375
7 $115,013 $7,768
8 $107,928 $7,452
9 $101,280 $7,254
10 $95,041 $7,101
Total $103,628
I don’t like to pay taxes that could be avoided. The Capital Stock Tax is easily avoided. Do not use a limited partnership and you can avoid the tax.
Some folks who attended one of our seminars have either begun the planning process themselves, or know someone who has. A number of these individuals have either used or are contemplating the use of a limited liability company. That of course leads to questions because as you know I am a big fan of the limited partnership for gifting and do not favor the limited liability company in Pennsylvania. My reason for the choice is rather simple – taxes. In Pennsylvania limited partnerships face fewer taxes than do limited liability companies. In particular, under Pennsylvania law limited liability companies must file a return for and pay the Capital Stock Tax. This is nothing new. Since 1995 limited liability companies in Pennsylvania have had to pay this tax. So why would Pennsylvania landowners use limited liability companies and pay a tax each year that they could avoid by using a limited partnership, you ask? That is a very good question. It is one that I put to landowners to ask to their professional advisors who have recommended the use of limited liability companies.
It is true that the Capital Stock Tax is presently slated to expire in 2014. It was also scheduled to expire in 2010, as well as years prior. At this point, with the dire financial circumstances which lawmakers and the governor face in Harrisburg (and many other state capitols for that matter) it is not likely that the Capital Stock Tax will expire any time soon. I fully expect that as the next "sunset" approaches, the Capital Stock Tax will again be extended. So do not count on the expiration of the tax as the justification for the use of a limited liability company. This tax seems to have more lives than cat. You cannot ignore it.
If the Capital Stock Tax were not significant, maybe I would think otherwise. Unfortunately, it is a very significant tax. Lets assume that you have 80 acres of land which is leased to an exploration company. In 2010 you created a limited liability company and transferred your land by deed to the limited liability company. Ignore for the moment that the transfer by deed is yet another mistake. With 80 acres the exploration company could put one well on your property.
In 2011 you start receiving royalties from the exploration company. Based upon current production models developed by geologists, which I fully expect to change in the coming months based upon information released recently by the state Department of Environmental Protection, over the first ten years you could expect to pay more than $100,000 in needless taxes. Set out below is a table which charts the Capital Stock Tax for the first 10 years of production. Compared to the royalties, the taxes are not significant. This still represents more than $100,000 in taxes that could have been completely avoided.
Year Royalties Tax
1 $455,813 $17,704
2 $214,951 $14,050
3 $160,053 $12,276
4 $133,868 $11,191
5 $120,160 $10,457
6 $112,758 $8,375
7 $115,013 $7,768
8 $107,928 $7,452
9 $101,280 $7,254
10 $95,041 $7,101
Total $103,628
I don’t like to pay taxes that could be avoided. The Capital Stock Tax is easily avoided. Do not use a limited partnership and you can avoid the tax.