Reforming the Tax Treatment of S-Corporations and Limited Liability Companies Can Help States Finance Public Services
 Limited Liability Companies can elect to be treated as taxable corporations for federal tax purposes. The discussion in this paper applies to LLCs that have not made such an election but rather have chosen to be treated as tax-exempt pass-through entities.
 Owners of S-Corps and LLCs are subject to tax each year on their pro-rata share of the business’s profits, whether or not the profits have actually been distributed to them. Many states require or allow the businesses to pay the personal income taxes owed by the owners to ensure that they are in fact paid (especially by out-of-state owners) and to relieve the owners of the need to file an income tax return. Taxes paid by S-Corps and LLCs on behalf of the owners are not the subject of this report and are not included in Table 1.
 The two principle sources of the information presented in Table 1 are: Robert W. Jamison, William N. Kulsrud, Linda Ethridge Curry, and Teresa Stephenson, 2009 Multistate Tax Guide to Pass-Through Entities (CCH, 2008), and John C. Healy and Michael S. Schadewald, 2009 Multistate Corporate Tax Guide on CD-ROM (CCH, 2008). Where it was contradictory, ambiguous, or appeared to be out-of-date, the information contained in these two references was verified with selective review of state statutes, regulations, and tax forms.
 Nearly all states require LLCs and/or S-Corps to file an annual report with the secretary of state and to pay an annual fee at the same time. In states in which the fee is due every other year, the amount shown in Table 1 is one-half of the biennial amount due. In states in which higher fees apply to S-Corps and LLCs formed out of state, the lower fee applicable to in-state entities is shown.
 The net worth of a business is its assets minus its liabilities. The net worth is also equal to the initial equity investments of owners plus all subsequent (net) injections of equity capital, plus all profits earned by the firm since its inception that were retained rather than paid out as dividends. Capital stock is defined differently among the states that calculate their taxes on this base; in some cases it refers to the initial investment of equity investors.
 See the tables titled “S Corporations: Synopsis of Tax Liability Computations” and “C Corporations: Synopsis of Tax Liability Computations,” both available at www.ftb.ca.gov/aboutFTB/Tax_Statistics/Reports/ Business_Entities/Corporations/2006/PDF/2007_Tax_Liability_Computations_C_and_S.pdf.
 Pennsylvania Department of Revenue, “Tax Year 2002 Statistics on Capital Stock/Franchise Tax [and] Corporate Net Income Tax,” July 2007, Table 3 and 5. Available at www.revenue.state.pa.us/revenue/lib/revenue/2002_corp_tax_stats.pdf.
 Limited liability for all owners is a characteristic of all corporations. From a legal standpoint, an S Corporation is no different than any other corporation; it is simply a conventional corporation that has the ability to elect tax-exempt status under federal tax law if it meets the requirements for such status. These include a maximum of 100 shareholders (who generally must be individuals) and the satisfaction of a number of other criteria.
 There is another form of pass-through entity, the “limited partnership,” in which virtually all owners enjoy limited liability. Every limited partnership, however, must have a “general partner” that does not have limited liability. Since that general partner can be a corporation or limited liability company, some limited partnerships effectively provide limited liability for all owners just as S-Corps and LLCs do. An argument can be made in that case that they should be subject to the same taxes and fees as S-Corps and LLCs, and in some states they are.
 In support of the federal corporate income tax enacted in 1909, President Taft stated, “[T]his is an excise tax upon the privilege of doing business as an artificial entity and of freedom from a general partnership liability enjoyed by those who own the stock.” Opponents objected to this argument, pointing out that corporations are creatures of state governments, not the federal government — arguably conceding the point that states could tax corporations under this rationale even if the federal government could not. This history is discussed in Reuven S. Avi-Yonah, “Corporations, Society, and the State: A Defense of the Corporate Tax,” Virginia Law Review, September 2004.
Avi-Yonah’s article surveys the substantial debate that exists to this day as to whether there is a justification for an entity-level tax on corporations in addition to an income tax on corporate income received by individual owners of the corporation. Along with some other economists and legal theorists who have addressed this issue, Avi-Yonah rejects the argument that the federal corporate income tax is justifiable as a payment for the privilege of doing business in corporate form. He does not, however, address whether state corporate income taxes could reasonably be justified on such grounds.
 Thirty-one states plus the District of Columbia levy significant, variable taxes and/or fees on S-Corps or LLCs. In the following 17states the taxes and fees are significantly different for the two types of entities: Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Massachusetts, Mississippi, Missouri, Nebraska, Nevada, New Jersey, North Carolina, Oklahoma, South Carolina, Tennessee, and Virginia. In addition, many of the states that levy fixed-dollar taxes or fees impose them on S-Corps but not LLCs.
 Wyoming was the first state to authorize LLCs, in 1977.
 Some of the taxes and fees listed in Table 1 apply only to S-Corps and LLCs formed under the laws of the state, not to out-of-state S-Corps and LLCs doing business in the state. Where these taxes and fees are substantial, they may raise similar “level playing field” issues.
 See: Associated Press, “Tribune Posts $1.82B 1Q Gain on Tax Status Change; Sales Ebb,” International Herald Tribune, May 9, 2008. See also the website of Chrysler LLC at www.chrysler.com