Choice of Entity: An Overview of Tax and Non-Tax Considerations discusses state and federal income tax and other considerations pertinent in choosing the most advantageous legal form for conducting business and investment activities. It provides a summary perspective on the various legal forms of business enterprises and their relative advantages and disadvantages. Written by Bruce P. Ely, Esq. and Christopher R. Grissom, Esq., both of the law firm Bradley Arant Rose & White LLP, this Portfolio examines both the tax and non-tax considerations of which a practitioner should be aware in advising a client on the choice of business form: sole proprietorship, general partnership, limited partnership, regular corporation, S corporation, LLC, LLP, LLLP, and business trust. Selecting the form in which a business will operate is one of the most significant decisions a client starting a new business, or continuing an existing one, will have to make.
This Portfolio also provides practitioners with a checklist to which they may refer in advising clients on the choice of entity, i.e., to assist practitioners in making certain they have considered all the issues that could materially affect a recommendation to a client on this complicated issue, including:
In addition, Choice of Entity: An Overview of Tax and Non-Tax Considerations provides an analysis of the relevant principles of federal and state law that govern choice-of-entity decisions. Because this Portfolio is a survey, however, touching upon a broad range of topics that could affect a choice-of-entity decision, the authors have, in many cases, summarized principles of law. Discussions of state law are generally limited to individual state examples or references to uniform state acts such as the Model Business Corporation Act, the Revised Uniform Partnership Act, and the Revised Uniform Limited Partnership Act. Discussions of complex areas of federal law, such as federal income taxation of deferred compensation plans and the minimum and alternative minimum tax, examine the essential principles of law involved, with emphasis on how they affect choice-of-entity decisions.
Choice of Entity: An Overview of Tax and Non-Tax Considerations allows you to benefit from:
This Portfolio is part of the Premier State Tax Library , a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.
Detailed Analysis
1550.01. INTRODUCTION
1550.02. CHOOSING THE BUSINESS ENTITY: THE VARIOUS FORMS IN WHICH BUSINESS CAN BE CONDUCTED
A. Introduction
B. The Sole Proprietorship
1. In General
2. Organization of a Sole Proprietorship
3. Operation of a Sole Proprietorship
4. Transfer of Interest in a Sole Proprietorship
5. Termination of a Sole Proprietorship
6. Assessment of the Sole Proprietorship as a Form of Doing Business
C. The General Partnership
2. Organization of a Partnership
3. Operation of a Partnership
4. Transfer of Interest in a Partnership
5. Termination of a Partnership
6. Assessment of the Partnership as a Form of Doing Business
7. LLP
D. The Limited Partnership
2. The Publicly-Traded Limited Partnership
E. The LLLP
F. The C Corporation
2. Organization of a Corporation
3. Operation of a Corporation
4. Transfer of Interest in a Corporation
5. Termination of a Corporation
6. Assessment of the Corporation as a Form of Doing Business
G. The S Corporation
2. Organization and Eligibility for S Corporation Status
3. Operation of an S Corporation
4. Transfer of Interest in an S Corporation
5. Termination of an S Corporation
6. Subsidiaries
7. Assessment of the S Corporation as a Form of Doing Business
H. The LLC
2. Organization of an LLC
3. Operation of an LLC
4. Transfer of Interest in an LLC
5. Termination of an LLC
6. Single Member LLCs
7. Assessment of the LLC as a Form of Doing Business
8. "Series" LLCs
I. The Professional Corporation or Association; the Partnership Including PCs or Associations
2. Organization of a PC
3. Operation of a PC
a. Formalities
b. Income Taxation of PIPiCs: I.R.C. § 269A
4. Transfer of Interest in a PC
5. Termination of a PC
6. Assessment of the PC and PIPiC as a Form of Doing Business
J. Other Forms of Business Organization
1. The Joint Stock Company
2. The Business Trust
3. The Delaware Headquarters Management Corporation
1550.03. VARIOUS TAX AND NON-TAX CONSIDERATIONS IN CHOOSING THE APPROPRIATE BUSINESS FORM
A. The Check-the-Box Regulations
1. The 1996 Final Regulations
2. Classification as a "Business Entity"
a. Corporations
b. Partnership
c. Limited Liability Companies
d. Trusts
e. Domestic Eligible Entities
f. Foreign Eligible Entities
g. Entities in Existence Prior to January 1, 1997
3. Making an Election
B. Limited Liability
2. The Sole Proprietorship
3. The C Corporation
4. The S Corporation
5. The Partnership
6. The Limited Partnership
7. The Limited Liability Company
C. Administrative Requirements: Required Documents, Tax Returns, Etc.
a. Non-Tax Considerations
b. Tax Considerations
3. The Partnership
(1) Tax Returns
(2) Partnership Taxable Year
4. The Limited Partnership
(1) Documents to File
(2) Limited Partners' Rights
5. The C Corporation
a. In General
b. Non-Tax Considerations
(1) Articles of Incorporation
(2) Bylaws
(3) Board of Directors
(4) Shareholders
(5) Other Non-Tax Administrative Requirements of Corporations
c. Tax-Related Administrative Requirements of C Corporations
6. S Corporations
(2) S Corporation Taxable Year
7. Limited Liability Company
D. Reasonable Compensation
1. C Corporations
2. S Corporations
E. Retirement Plans and Employee Fringe Benefits
1. Tax-Qualified Retirement Plans
2. Employee Fringe Benefits
F. Employment Taxes
G. Treatment of Capital Gains and Losses
H. Accumulated Earnings Tax and Personal Holding Company Tax
I. Alternative Minimum Tax (AMT)
1. Introduction
2. Computation
b. Differences Between C Corporations and Other Taxpayers
(1) Tax Rate
(2) Exemption Amount
(3) Adjustments
(4) Other
(5) State AMT
3. Effect of Recordkeeping Burden
J. Reduction of C Corporation Preference Items
K. Problems Involving Reallocation of Income
2. Assignment-of-Income Doctrine
3. Section 482
4. Section 269
5. Section 269A
L. Limitations on Passive Losses and Credits
M. Other Considerations
1. Deductibility of Net Operating Losses
2. Deductibility of Charitable Contributions
3. Treatment of Tax-Exempt Income
4. Securities Law Considerations
5. Accounting Methods Available
(1) Cash Method
(2) Accrual Method
(3) Other Permissible Methods
(4) Hybrid Methods
b. Sole Proprietorship
c. Partnership
d. C Corporation
e. S Corporation
f. Limited Liability Company
g. Comparisons
6. 1993 RRA Small Business Provisions
1550.04. TAX-PLANNING OPPORTUNITIES PERTINENT TO CHOICE OF ENTITY
Introductory Material
A. Income Tax Planning
1. Income-Splitting Between the Business Entity and Its Owners
a. Benefits of Income-Splitting
b. Means of Achieving Income Splitting
(1) Payment of Compensation to Employee-Owner
(2) Renting to the Corporation
(3) Other Methods
c. Possible IRS Attacks on Income-Splitting Between a C Corporation and Its Owners
(1) Accumulated Earnings Tax
(2) Personal Holding Company Tax
(3) Constructive Dividends
(4) Assignment of Income and Related Doctrines
2. Income–Splitting Between Business Owners and Family Members
a. Employing Family Members in the Business
b. Leasing From Family Members
c. Family Members as Principals: Family Partnerships and Family Members as Shareholders of S Corporations or C Corporations
(1) The C Corporation
(2) Family Partnerships (or Family LLCs)
(3) S Corporations with Family Members as Shareholders
3. Pass-Through and Special Allocation of Tax Items
4. Dividends and Other Investment Income
5. Loss Deduction on Worthlessness of Business
B. Estate Planning
1. Special Considerations in Estate Planning for a Business Owner
a. Liquidity Problems
b. Risk of Protracted Disputes
c. Tension Between Participating and Non–Participating Offspring
d. Balancing Interests of Unrelated Persons
2. Estate Planning and the Sole Proprietorship
3. Sale, Redemption, or Liquidation of Interest at Death
a. Sale or Redemption of Stock Versus Sale of Partnership or LLC Interest
b. Sale or Redemption of Stock Versus Liquidation of Partnership or LLC Interest
c. Effect of Insurance or Accumulation of Earnings for Funding the Purchase of a Decedent's Interest
d. Effect of Purchase or Liquidation of a Decedent's Interest in a Family-Held Business
4. Conclusions
1550.05. CHANGING THE FORM OF THE BUSINESS
A. Changing the Form of a Sole Proprietorship
1. Control Requirements
2. Gain Recognition
3. Sales and Use Taxes
B. Incorporating a Going Business
2. Transfer of Ordinary Income Assets and Current Liabilities
3. Carryover of Tax Attributes
4. The Problem of the Service Provider
5. Incorporating a Partnership
6. Taxable Incorporations
C. Changing from an S Corporation to a C Corporation
D. Changing from a C Corporation to an S Corporation
E. Changing from Corporate to Non-Corporate Status
F. Converting an Existing Business to an LLC
Working Papers
Item Description Sheet
Worksheet 1 Checklist of Significant Information to Obtain from Client with Respect to Choice of Entity
Worksheet 2 Checklist of Analytical Steps in Making the Choice-of-Entity Decision
Worksheet 3 Checklist of Significant Non-Tax Factors Pertinent to Choice of Entity
Worksheet 4 Checklist of Significant Tax Factors Pertinent to Choice of Entity
Worksheet 5 Checklist of Significant Differences Among S Corporations, Partnerships, Limited Liability Companies, and Limited Partnerships
Worksheet 6 Sample Letter to Client on Choice of Entity
Worksheet 7 IRS DOCUMENTS
Worksheet 8 State Tax Treatment of Limited Liability Companies and Limited Liability Partnerships
Worksheet 9 Limited Liability Partnerships State-by-State Summary
Worksheet 10 Tabular Analysis - Choice of Business Entity Issues
Worksheet 11 TAX TREATMENT OF LLCs/LLPs/LPs ("LLEs") BY STATES IMPOSING NET WORTH- OR DEBT-BASED CORPORATE FRANCHISE TAXES
Worksheet 12 State Tax Treatment of LLCs and LLPs- Nonresident Member/Partner Withholding
Worksheet 13 State Nonresident Withholding and Composite Return Requirements for Pass-Through Entities
Worksheet 14 Limited Liability Companies and Cross Entity Mergers
Worksheet 15 Limited Liability and Conversion Statutes
Worksheet 16 A Comparison of Business Laws and Taxation (Part I)
Worksheet 17 A Comparison of Business Laws and Taxation (Part II)
Worksheet 18 Finding Neverland: Will Delaware's New Corporate Entity Help Taxpayers Escape the Hooks of State Anti-PIC Laws?
Bibliography
BIBLIOGRAPHY