Entity Types and Entity Types and Why it is Such an Why it is Such an

Important DecisionImportant Decision

Brian MillerBrian MillerMiller Grossbard Advisors, LLPMiller Grossbard Advisors, LLP

Business Advisors / Certified Public Business Advisors / Certified Public AccountantsAccountants

Certified Valuation AnalystsCertified Valuation Analysts

Issues in choosing the Issues in choosing the right entityright entity

Organizers of a new business Organizers of a new business enterprise must decide upon the enterprise must decide upon the most beneficial legal and tax most beneficial legal and tax structure for that venture.structure for that venture.

They should choose the entity form They should choose the entity form that provides both (1) the greatest that provides both (1) the greatest income tax planning benefits and (2) income tax planning benefits and (2) business planning opportunities.business planning opportunities.

Basic business entity forms Basic business entity forms can includecan include

PartnershipsPartnerships C CorporationC Corporation S CorporationS Corporation LLCLLC

General PartnershipGeneral Partnership

General informationGeneral information Unincorporated entity with at least two ownersUnincorporated entity with at least two owners Ownership is in the form of units, shares or Ownership is in the form of units, shares or

percentagespercentages No limit on number of partnersNo limit on number of partners No restrictions on kinds of owners that can be No restrictions on kinds of owners that can be

partnerspartners Liability protectionLiability protection

A general partnership is nominally responsible for A general partnership is nominally responsible for own debts. General partners are also personally own debts. General partners are also personally responsible for all partnership recourse debtresponsible for all partnership recourse debt

General Partnership General Partnership (continued)(continued)

TaxationTaxation A general partnership does not pay taxA general partnership does not pay tax Partners are taxed directly on their partnership-level Partners are taxed directly on their partnership-level

incomeincome General Partner is subject to self-employment taxGeneral Partner is subject to self-employment tax Partners can deduct losses recognized at the Partners can deduct losses recognized at the

partnership levelpartnership level Estate planningEstate planning

An interest in a partnership may be valued at a An interest in a partnership may be valued at a discount to the value of assets owned by the discount to the value of assets owned by the partnership. Discounts in a general partnership are partnership. Discounts in a general partnership are not as deep as those for corporations, limited not as deep as those for corporations, limited partnerships or limited liability companiespartnerships or limited liability companies

Limited PartnershipLimited Partnership General informationGeneral information

Same as General PartnershipSame as General Partnership Liability protectionLiability protection

Limited partners are generally not liable for debts Limited partners are generally not liable for debts of partnership, but they must restrict participation of partnership, but they must restrict participation in management or risk loss of limited liabilityin management or risk loss of limited liability

TaxationTaxation Limited partnership does not pay any taxLimited partnership does not pay any tax Partners are taxed directly on their partnership-Partners are taxed directly on their partnership-

level incomelevel income Generally limited partners can deduct losses Generally limited partners can deduct losses

recognized at the partnership level only if they recognized at the partnership level only if they have other passive incomehave other passive income

Limited Liability Limited Liability PartnershipPartnership

General informationGeneral information Hybrid entity that confers partial Hybrid entity that confers partial

limited liability to its memberslimited liability to its members Can choose to be taxed either as a Can choose to be taxed either as a

corporation or partnershipcorporation or partnership Created under state law by registering Created under state law by registering

under a state LLP statuteunder a state LLP statute

C CorporationC Corporation

General informationGeneral information Organized under state statuteOrganized under state statute Ownership is in the form of stockOwnership is in the form of stock No limit to number or type of shareholdersNo limit to number or type of shareholders No limit on number of classes of stockNo limit on number of classes of stock

Liability protectionLiability protection Corporation owns its assets and is liable for Corporation owns its assets and is liable for

its debtsits debts Shareholders are not liable for corporate Shareholders are not liable for corporate

debtsdebts

C Corporation C Corporation (continued)(continued)

TaxationTaxation A C Corporation is taxable on the A C Corporation is taxable on the

income it earnsincome it earns Taxed at graduated rates like an Taxed at graduated rates like an

individualindividual Shareholders are taxed on dividends Shareholders are taxed on dividends

from corporationfrom corporation Estate planningEstate planning

Same as a general partnershipSame as a general partnership

S CorporationS Corporation

General informationGeneral information US corporation that elects to be treated US corporation that elects to be treated

as a pass-throughas a pass-through Ownership is in the form of stockOwnership is in the form of stock Can have no more than 100 shareholders Can have no more than 100 shareholders

and only one class of stockand only one class of stock Eligible shareholders include:Eligible shareholders include:

IndividualsIndividuals Certain estates, trusts and other S Certain estates, trusts and other S

corporationscorporations

S Corporation S Corporation (continued)(continued)

Liability protectionLiability protection Same as C Corporation outlined aboveSame as C Corporation outlined above

TaxationTaxation Not taxable on the income it earnsNot taxable on the income it earns Shareholders are taxed on corporate Shareholders are taxed on corporate

level income regardless of whether that level income regardless of whether that income is distributedincome is distributed

Estate planningEstate planning Same as C Corporation outlined aboveSame as C Corporation outlined above

Limited Liability Limited Liability CompanyCompany

General informationGeneral information Hybrid entity that is treated like a Hybrid entity that is treated like a

corporation for liability purposes, but for corporation for liability purposes, but for tax purposes can choose to be taxed as a tax purposes can choose to be taxed as a corporation or partnershipcorporation or partnership

Created under state law by statuteCreated under state law by statute TaxationTaxation

Taxed under the same rules as those of a Taxed under the same rules as those of a general partnership if elected or in the general partnership if elected or in the same manner as a corporationsame manner as a corporation

Issues to consider when Issues to consider when choosing an entitychoosing an entity

Type of assets to be owned by businessType of assets to be owned by business Working capital needsWorking capital needs Multi-state operationsMulti-state operations Carried interestsCarried interests Start up lossesStart up losses Special allocations requiredSpecial allocations required DistributionsDistributions Permissible shareholdersPermissible shareholders Owner salariesOwner salaries