More unintended consequences?
The article below details a proposal from Senator Susan Collins (R- Maine) to exempt business income from “small” LLC’s (or other pass through business entities such as partnerships and S corps) from personal tax increases. Small is defined as 500 employees or fewer. This is intended as a possible way to bridge differences between House Republicans and President Obama and Senate democrats in their current tax and budget negotiations.
That would be yet another mistaken government move, one that would lead to major unintended consequences. Companies would have an incentive to split up to get under 500 employees or not to grow past that level which would reduce rather than increase employment. A far better approach would be to say that any business income which stays inside an LLC or similar entity of any size will not be taxed. At present, when an LLC retains money in order to make an investment, the shareholders must still pay tax on the money that is retained. So, if the business retains $50,000 to hire a new employee, the shareholders will still owe tax on that $50,000.
If any tax carve out is contemplated, far better that it take this form.