Choice of Entity (Portfolio 700)

Product Code: TPOR41

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Description
Table of Contents
Authors

Choice of Entity, written by William P. Streng, Esq., Vinson & Elkins Professor of Law at the University of Houston Law Center and a consultant for Bracewell & Giuliani, discusses federal income tax and other considerations pertinent in choosing the most advantageous legal form for conducting business and investment activities.

This Portfolio provides a summary perspective on the various legal forms of business enterprises and their relative advantages and disadvantages. These forms primarily include a sole proprietorship, a general partnership, a limited partnership, a C corporation, an S corporation, a limited liability company, and a trust. A variety of other specialized entities have unique treatment as specified under the Internal Revenue Code, however, and those entities (including, e.g., publicly traded partnerships) are also examined in this Portfolio.

The discussion in this Portfolio has been quite significantly impacted by the choice of entity or “check-the-box” regulations, which went into effect on January 1, 1997. These regulations permit much greater flexibility and far fewer impediments in the choice of a business entity.

A comparison of the attributes of the various entities necessitates an examination of both (i) the legal and business structure and (ii) particularly for purposes of this Portfolio, the federal income tax rules applicable throughout the entire life cycles of these entities. This Portfolio provides an expansive discussion of the various entity characterization rules of the “check-the-box” regulations.

Further, this Portfolio includes a comparison of the income tax rules applicable to entities (i) when being organized, (ii) when operating and receiving profits or incurring losses, (iii) when making distributions of profits in cash, property, or entity ownership units, (iv) when terminating an ownership interest, (v) when the entire enterprise terminates, and (vi) when the enterprise engages in a tax-free restructuring. Various additional issues relevant to entity choice, including estate-planning considerations, are also examined in this Portfolio.

Choice of Entity allows you to benefit from:

Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
Invaluable practice documents including tables, charts and lists.
Plain-English guidance from world-class experts.
Real-world and in-depth analysis that lets you explore various options.
Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. The Framework for Choosing a Business Entity

A. The Issues in Choosing a Business Entity

B. Evolution of Relevant Federal Income Tax Legislation

1. Business Tax Legislative Changes

2. The Tax Reform Act of 1986

3. The Revenue Reconciliation Act of 1990

4. The Omnibus Budget Reconciliation Act of 1993

5. The Small Business Job Protection Act

6. The Taxpayer Relief Act of 1997

7. Internal Revenue Service Restructuring and Reform Act of 1998

8. The 2001 Tax Relief Act

9. The Jobs and Growth Tax Relief Reconciliation Act of 2003

10. The American Jobs Creation Act of 2004

11. Tax Increase Prevention and Reconciliation Act of 2005

C. The 1996 "Check the Box" Entity Classification Rules

D. Possible Future Legislative Developments

1. Evaluating the Classification System of Corporate-Shareholder Taxation

2. Simplification of the Business Income Taxation

3. Possible Future (2007 and Beyond) Legislative Changes

E. An Overarching Consideration - The Advisor's Ethical Issues

II. Alternative Business Organization Forms

A. Options for the Choice of the Business Entity

B. Sole Proprietorship

C. Joint Venture

D. General Partnership

E. Limited Partnership

1. In General

2. Family Limited Partnership

F. Limited Liability Partnership

G. Limited Liability Limited Partnership

H. Publicly Traded Partnership

I. Limited Liability Company

1. Benefits of the LLC Structure

2. The LLC as an Alternative to the S Corporation

3. The LLC as an Alternative to Partnerships

4. The "Series LLC"

J. C Corporation

K. S Corporation

L. Special Entities

1. Special Income Taxation Criteria

2. Small Business Corporation, Qualified Small Business Corporation, and Specialized Small Business Investment Company

a. Section 1244/Small Business Corporation Stock

b. "Qualified Small Business Stock"

c. Specialized Small Business Investment Company

3. Financial Institutions

4. Insurance Companies

5. Real Estate Investment Trust

6. Regulated Investment Companies

7. Real Estate Mortgage Investment Conduits

8. Financial Asset Securitization Investment Trust

9. Domestic International Sales Corporation

10. Foreign Entities

a. Classification of Foreign Entities

b. Foreign Partnerships

c. Foreign Corporations

d. Controlled Foreign Corporation

e. The Repealed Foreign Sales Corporation and Extraterritorial Tax Regimes

f. Passive Foreign Investment Companies

g. Stapled Entities

h. "10-50 Corporations"

i. Dual Resident Corporations

M. Trusts and Estates

1. Alternatives

2. Lifetime/Inter Vivos Trusts

3. Testamentary Trusts

4. Grantor Trusts

5. Business Trusts

6. Foreign Trusts

7. Investment Trusts

8. Liquidating Trusts

9. Estates

N. Nominees/Dummy Corporations

O. Tax-Exempt Entities

P. Cooperatives

Q. Other Specialized Entities

R. Special Funds

1. Section 468B Designated Settlement Fund

2. Nuclear Decommissioning Reserve Fund

3. Environmental Remediation Trusts

S. Nontaxable Entities

III. Federal Tax Classification of Entities

A. Summary Perspective

B. History of the "Association" Classification Dispute

1. Background

2. Tax Cases and Rulings on the Validity of a Corporation

3. Tax Impact of Incorrect Entity Classification

C. Pre-1997 Entity Classification Rules

1. Characteristics

a. Relevant Criteria

b. Preponderance of Corporate Characteristics Required

c. Other Classification Factors

2. Associates

3. Objective to Carry on Business and Divide the Gains

4. Continuity of Life

a. In General

b. Effect of Agreement to Continue Business

5. Centralized Management

a. In General

b. Partnerships

c. Limited Liability Companies

6. Limited Liability

a. In General

b. General Partnerships

c. Limited Partnerships

d. Limited Liability Companies

7. Free Transferability of Interests

D. Entity Classification Under the "Check-the-Box" Regulations

1. Background

2. Summary of the 1996 Entity Classification Regulations

3. Schematic Outline of Classification System

4. Identifying Separate Entities

a. Joint Undertakings

b. Certain Local Law Entities Not Recognized

c. Single-Owner Organizations

d. Cost Sharing Arrangements

5. Business Entities

a. In General

(1) Specially Treated Organizations

(2) Trusts

b. Corporations

(1) In General

(2) Foreign Entities

(a) Per Se Corporations

(b) Exceptions for Certain Foreign Entities

6. Elective Classification of "Eligible Entities"

a. In General

b. Entities with Two or More Members

c. Single-Member Entities

7. Default Classification Rules

a. Domestic Eligible Entities

b. Foreign Eligible Entities

c. Exception for Existing Eligible Entities

(1) In General

(2) Foreign Entity Classification Must Be "Relevant" Prior to Regulations

8. Elections

a. Necessity

b. Election Procedure

(1) Form 8832

(2) Attachment of Form 8832 to Return of Entity or Owners

(3) Signature on Form 8832

(4) Taxpayer Identification Numbers

(5) Relief for Certain Foreign Eligible Entities

c. Effective Date of Election

(1) In General

(2) Special Rules

(a) Tax-Exempt Organizations

(b) REITs

d. Restriction on Classification Changes

e. Loss of Classification

9. Effective Date of Check-the-Box Regulations

10. Information Return Concerning Foreign Disregarded Entities

E. Planning Implications of the Check-the-Box Regulations

1. Use of Limited Liability Companies (LLCs)

2. Single Member Entities

a. In General

b. An Alternative to the S Corporation

c. State Tax Considerations

d. Section 1031 Like Kind Exchanges

e. Consolidated Returns

f. Achieving U.S. Tax Deferral on Foreign Earnings

g. Foreign Tax and Foreign Tax Credit Impact

h. Section 367 Applicability

i. Recognition of Deficits with a Foreign Structure

j. Avoiding PFIC Status

k. Summary Concerning Branch Treatment

3. Simplification of Organizational Documents

4. Estate Planning/Valuation Considerations

5. Elimination of 1% Test for Partners or Members

6. Foreign Tax Planning

7. Changing the Tax Status of Entities

a. Potential Tax Impact on Changing Classification

b. Association Status Elected

c. Election by Disregarded Entity to Be an Association

d. Changing from Association to Partnership Status

e. Association or Partnership Elects to Be a Disregarded Entity

f. Changing from One Partnership Type to Another Partnership Type

g. Changing from Single Member Disregarded Entity to Partnership

h. Changing from C Corporation to S Corporation

i. Changing from Foreign Corporation to Single Member Entity

j. Changing from Per Se Corporation to Entity Electing Corporate Classification

IV. Business/Local Law Considerations in Choosing an Entity

A. Business Planning Issues

B. Term of the Entity's Existence

C. Transferability of Interests

1. Partnerships

2. Corporations

3. Trusts

4. Limited Liability Companies

D. Limitation of Liability

1. Partnerships

2. Corporations

3. Business Trust

4. Limited Liability Companies

E. Expense and Complexity of Forming and Operating Entity

1. Corporations

2. Partnerships

3. Limited Liability Companies

4. Business Trusts

F. Entity Recognition in Another Jurisdiction

G. Consistency in Treatment Between State Law and Federal Tax Law

V. Organizational Considerations

A. Organizational Mechanics and Transfers of Property to New Entities

1. Entity Formation Issues

2. Sole Proprietorship