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I don't disagree with this but I don't think this strategy could be used in the scenario presented - a consulting business formed by two active consultants. If memory serves, individuals engaged in consulting activities are considered active participants, even if they don't meet the 500 hour requirement.

You're right - I'd strayed a bit from the original question in my LLC proselytizing! But I am always looking for an opportunity to spread the word that S corps aren't the only way to minimize SE tax.

Also, I'm not sure what additional liability protection they would get from an LLC/S corp over and above a regular S corp. In my state (Pa.), there's a $50 per member per year fee imposed on LLCs.

Charging order protection can be very valuable. Whereas a corporate shareholder's stock is exposed to his creditors, an LLC member's LLC membership interest cannot be directly reached by a creditor. The creditor can obtain a charging order giving the creditor the debtor-member's economic rights to distributions, but NOT the member's management and/or voting rights. If the LLC doesn't make distributions, the creditor could have a long wait and could be taxable on the LLC profits allocable to the interest (despite receving no actual distributions). This can provide a strong incentive to settle that's not there where the debtor's business interest is corporate stock.

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