Corps, Fed IDs, Why Me?
Choice of Entity
Understanding the Pros and Cons
of Entity Types
Available Entity Types
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4 Basic Entity Types
– No-Entity – Sole Proprietorship – Partnership
– Corporation
– Limited Liability Company
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Special Entity Types
– Professional Corporation – Professional LLC
– Limited Liability Partnership – Not-for-Profit Corporation – Trust
Overview
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There is no one right answer
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How various aspects of a client’s business fit together
will determine what entity type or types are most
appropriate
Succession History Control Liability Investors Business Exit Strategy Cost TaxesSole Proprietorship
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If an individual starts a business without forming
an entity, they are a sole proprietor
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No separate legal entity
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Filing a d/b/a does not form an entity
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Sole proprietors are personally liable for all of
the obligations of their business
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No or little formation expense
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Insurance can offset many risks
Partnership
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Two or more people sharing profits of a business
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No filing required to form the partnership, but d/
b/a filing is required to avoid fines
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Partnership is a separate legal entity from the
partners
– It can own assets
– It can sue and be sued
– It can enter into contracts
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Every partner has apparent authority to bind the
partnership
Partnership - Pros
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Little required formation expense
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Partnership does not pay income tax as an entity (single
level of taxation)
– Partnership must file state and federal tax returns
– Partners pay taxes on their share of the partnership income or loss
– Tax is due even if income not paid to the partner
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Great flexibility
– Easy to add or remove partners
– Can agree on different ways to divide profits and losses – Opportunity to structure transactions between partners and
Partnership - Cons
l A comprehensive Partnership Agreement can be expensive to draft; contains provisions regarding: – Voting Rights – Retirement – Disability – Withdrawal – Transferability of Ownership
l All partners are JOINTLY AND SEVERALLY liable for the obligations of
the partnership
l Every partner has a common law right to withdraw from the partnership
– May be a breach of contract giving rise to a damage claim
– Withdrawing partner entitled to payment of the fair value of his or her partnership interest
l Under proper circumstances a partner may be entitled to an accounting
Special Partnership Types
l Limited Partnerships
– One or more General Partners l GP’s are traditional partners
l GP’s run the business, subject to the partnership agreement
– One or more Limited Partners
l LP’s are not personally liable for partnership obligations
l LP’s have little or no control of the business
– Useful in certain estate planning and investment situations
l Limited Liability Partnerships
– Created by statutory provision to allow existing partnerships to convert to a “LLC like” structure
– Governed by the partnership law
– Partners not personally liable for debts of the partnership, except personal professional liability
Corporations
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Formed by:
– Filing a Certificate of Incorporation with the Secretary of State - Filing Fee
– Adopting by-laws – Appointing directors
– Issuing Stock - Minute book, seal & stock cert. Appointing Officers
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Shareholders own the corporation
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Directors are elected by shareholders
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Directors govern the corporation
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Officers are appointed by directors
Corporation Pros
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Shareholders are not liable for the obligations of
the Corporation
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Rights of shareholders are clearly defined by law
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Shareholder rights can be limited or expanded in
Certificate of Incorporation
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Generally no right of withdrawal or accounting
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Shareholders are only taxed when stock sold or
dividend received
Corporation Cons
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Double taxation of corporate profits
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Shareholders have dissenter rights in certain situations
– Can require corporation to repurchase stock if corporation takes certain actions
– Court can end up determining purchase price
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Minority shareholders can force dissolution in certain
situations
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Majority shareholder must treat minority shareholders
fairly and per terms of Bylaws & Certificate of
Incorporation
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NY – 10 largest shareholders are personally liable for
wages
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Separate Shareholder Agreement needed to restrict
Special Corporation Types
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S-Corporation
– This is a tax election, not a different type of entity
– Corporation does not pay tax – eliminates double taxation – Corporation files federal and state tax return
– Corporation pays NY franchise tax
– Shareholders pay tax on their share of corporation’s income – even if no dividend paid
– No foreign or corporate shareholders allowed – Limited number of shareholders allowed (100)
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Professional Corporation – PC
– Only available for professionals
– Only licensed professional can own stock
Limited Liability Company
l Formed by:
– Filing Articles of Organization with the Secretary of State – Adopting an Operating Agreement
– Publishing a Notice of Formation in 2 newspapers
– Filing a Affidavit of Publication with the Secretary of State
– Members own the LLC
l LLC may be managed by Manager(s) or Members
– Election must be in Articles of Organization
– If managed by members, all members have apparent authority – If managed by manager(s), no apparent authority
l NY LLC Law gives extreme flexibility on structuring an LLC
– Can make it look like a partnership
– Can make it look like a Limited Partnership – Can make it look like a Corporation
LLC Pros
l Single Level of Taxation
– If only one member – disregarded for tax purposes (taxed like a sole proprietor)
– If multiple members – taxed as a partnership
l Limited Liability – Members are not personally liable for obligations
of the LLC
l Flexibility to:
– Create classes of Members – Divide profits and losses – Create or limit rights
– Grant preferred or guaranteed returns
l No common law right of withdrawal
l No dissenter rights
l No Member liability for wages
LLC Cons
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Multiple Member Operating agreement is a
complex agreement that can be expensive
to draft and negotiate with all Members
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Some tax issues remain unsettled
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Financial investors may not want
pass-through taxation
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Annual franchise fee can be expensive if
there are many members (Fee calculated
on a per member basis)
Special LLC Types
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Professional Limited Liability Company
– Only available for professionals
– Only licensed professional can be members
– Members remain liable for personal
professional liability
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Limited Liability Partnership
– In New York this is a type of partnership not a
LLC
Summary
l Entity choice can be used to limit personal liability
– LLC, Corporation, Limited Partnership (but only for the limited partners) – Multiple entities can be used to compartmentalize liability
l Entity choice can reduce taxes paid
– Pass through or single level of tax
l S-Corp
l Sole Proprietor
l LLC
l Partnerships
l Limited Partnerships
– Entity level taxation
l Corporation (C-Corp)
l Entity choice can help owners control the future of their business
– Limit transferability
– Eliminate ability to withdraw
– Avoid dissenter and minority ownership issues – Establish rules for retirement, disability, etc
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