Government contracting as an S corp v. LLC?

[MDJohn]

I have multiple small clients that perform services or provide products under USG programs, either as primes or subs. Many of them are corporations, treated for federal tax purposes as "S" corporations. Some of them are single-member or multiple member LLCs that are treated, for federal tax purposes, as disregarded entities or parternships, as applicable. In ten + years, no LLC client has reported any problems working in US government contracting because of its status as an LLC.

Recently, a co-owner of a small LLC advised that he needed to convert from an LLC to an S-corp, because of the nature of government accounting. He said that most accountants he has talked to who specialize in government contracting do not want to do work for his LLC, because it is too complicated under USG government accounting rules. Apparently, he was told that the same flexibility of LLCs that makes it useful for some businesses makes it more complicated for accounting purposes when doing Government contracting.

To those who work in the nuts and bolts of government contract accounting, is there any validity to this concern? Is there a disadvantage, from a government accounting viewpoint, to doing work for the USG as an LLC rather than a corporation? Do the government accounting principles and rules apply more clearly/better/advatageously to corporations than to LLCs?

Thanks,

John

[MBrown]

Consult a corporate tax attorney. Depending on your LLC/S-Corp's state of domicile and/or the state of domicle of the members/owners, there are advantages / disadvantages to both. Throwing government accounting standards on top of the varied liability and state & local tax treatments can be daunting.

[here_2_help]

Hmm. I've been doing government accounting coming on near 30 years now, the last dozen or so of which have been as a consultant. My consultancy is run as an "S" Corp.

LLC, C Corp, S Corp. Makes no difference at all. The government accounting rules are exactly the same for all commercial entities, though closely-held entities receive a bit more scrutiny than other types.

Somebody is BS'ing somebody, it seems to me.

Hope this helps.

[MDJohn]

Thanks. My impression is that the client's accountant knows S corps very well and LLCs less well, so he wants his clients to be S corps.

[Retreadfed]

As H2H said, the accounting rules are the same for the contractor. However, there can be some definitional issues. For example, what constitututes "compensation" to the owner of an S corp or a member of an LLC who is also an employee of the company? Similarly, state income taxes that are paid by owners of S corps or members of an LLC on income of the company are not allowable costs of the contractor as taxes. Also, if the contractor is an 8(a), special consideration is given to withdrawals from the company to pay these taxes in determining continued 8(a) eligibility.

[here_2_help]

For example, what constitututes "compensation" to the owner of an S corp or a member of an LLC who is also an employee of the company? Similarly, state income taxes that are paid by owners of S corps or members of an LLC on income of the company are not allowable costs of the contractor as taxes. Also, if the contractor is an 8(a), special consideration is given to withdrawals from the company to pay these taxes in determining continued 8(a) eligibility.

Yes. All valid points. But notice that the issues you identify are the same whether the entity is an S Corp or an LLC.

I call shenanigans.

H2H

[Retreadfed]

Right, so no difference between them in regard to these points. Thus, what was the point the so-called consultant was trying to make?

[here_2_help]

Retreadfed,

The "consultant" was lying to his client. Unfortunately, there are many upon many "consultants" out there who lack the right skill set to tackle client problems. I've encountered a few myself. The second rule of being an expert is to bound your expertise and not stray outside the bounds.

Back in the day, we had an expression: "The difference between a layperson and an expert is the ability of a traveler to read while flying and the length of a flight."

On a related note, I was lucky to come across the blog of a small business in the midst of a protracted battle with DCAA, DCMA ... and now DOJ. It's refreshing in its candor, though many will find the points to be ... unpalatable. The blog lists five important lessons learned for small businesses that seek to do business with DOD--really, more of warnings. Anyway, here's a link to a post entitled, "Why I Will Never Again Hire an Ex-DCAA Auditor" that is pretty much on point to this discussion.

H2H

[MDJohn]

Thanks. Very useful.