PORTFOLIO

Choice of Entity: An Overview of Tax and Non-Tax Considerations (Portfolio 1550)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors discuss state and federal income tax and other considerations pertinent in choosing the most advantageous legal form for conducting business and investment activities.

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AUTHORS

The Choice of Entity: An Overview of Tax and Non-Tax Considerations Portfolio provides a summary perspective on the various legal forms of business enterprises and their relative advantages and disadvantages. These forms include the sole proprietorship, a general partnership, a limited partnership, a regular corporation, an S corporation, an LLC, an LLP, an LLLP, and a business trust.


This Portfolio also 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.

BRUCE P. ELY, ESQ.

Bruce P. Ely is a Partner in the Birmingham office of Bradley Arant Boult Cummings LLP where his practice focuses on representing taxpayers before federal, Alabama, and local administrative and judicial forums; advising companies on choosing the proper form of entity through which to conduct business in the Southeast and potential tax incentives; and advising companies and various trade and professional organizations regarding state and local tax legislative and policy matters.

 

Mr. Ely has handled projects as diverse as serving on the recruiting teams that successfully induced JVC America, Mercedes-Benz, and later Hyundai, to locate their first U.S. manufacturing plant in Alabama, while representing taxpayers before the Internal Revenue Service, the Alabama Department of Revenue, and local taxing authorities.

He earned his B.S., cum laude, from the University of Alabama, his J.D. from the University of Alabama School of Law and his LL.M. from the New York University School of Law.

 

He is the author of Bloomberg BNA Corporate Practice Portfolio Series No. 50-4th, Choice of Entity: Legal Considerations and State Tax Portfolio 1550-1st: Choice of Entity: An Overview of Tax and Non-Tax Considerations.

 


CHRISTOPHER R. GRISSOM, ESQ.

Christopher R. Grissom is a senior associate in the Birmingham, Alabama office of Bradley Arant Boult Cummings LLP. His practice involves state and local tax planning, LLCs, and federal and state tax disputes. He is a contributing editor to State Tax Notes, State Income Tax Alert, Journal of Multistate Taxation, and BNA Multistate Tax Report. In addition, he is a member of the ABA Section of Taxation and the Alabama State Bar Section of Taxation.

 

Credentials / Christopher received his B.S. in 1993 from the University of Alabama's Culverhouse School of Accountancy and his law degree, cum laude, in 1997 from the University of Alabama School of Law, where he was a student editor of The American Journal of Tax Policy. 


TABLE OF CONTENTS

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

1. In General

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

1. In General

2. The Publicly-Traded Limited Partnership

E. The LLLP

F. The C Corporation

1. In General

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

1. In General

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

1. In General

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

1. In General

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

1. In General

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.

1. In General

2. The Sole Proprietorship

a. Non-Tax Considerations

b. Tax Considerations

3. The Partnership

a. Non-Tax Considerations

b. Tax Considerations

(1) Tax Returns

(2) Partnership Taxable Year

4. The Limited Partnership

a. Non-Tax Considerations

(1) Documents to File

(2) Limited Partners' Rights

b. Tax Considerations

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

a. Non-Tax Considerations

b. Tax Considerations

(1) Tax Returns

(2) S Corporation Taxable Year

7. Limited Liability Company

a. Non-Tax Considerations

b. Tax Considerations

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

a. In General

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

1. In General

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

a. In General

(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

Introductory Material

A. Changing the Form of a Sole Proprietorship

1. Control Requirements

2. Gain Recognition

3. Sales and Use Taxes

B. Incorporating a Going Business

1. Introduction

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

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