#8758 - Law And Business Entity Chart Breakdown

	S Corp	C Corp	SP	GP	LLC	LP	LLP
Formation	Certificate of Incorporation	Certificate of Incorporation	Default – no filing	Default – no filing	Must file under state LLC Act	Must file w/Secretary of State	Must file a certificate w/OK Secretary of State
Mgmt	Board of Directors manages business, not S/Hs	Board of Directors manages business, not S/Hs	Only 1 owner who directly manages everything	Partners have = rights to manage the business, unless they agree otherwise	Member-Managed: Mgmt is shared among the owners Mgr.-Managed: day-to-day operations conducted by “mgrs.”	Limited Partners don’t have mgmt rights – mgmt is in hands of General Partners	Partners have = rights to manage the business, unless they agree otherwise
Personal Liability	Ltd Liability: S/Hs, board members, & officers not personally liable for business debts of business – paid out of corp assets S/Hs – Veil Piercing	Ltd Liability: S/Hs, board members, & officers not personally liable for business debts of business – paid out of corp assets S/Hs – Veil Piercing	Debts paid from the personal assets of the owner. Individuals are always liable for their personal wrongdoing & for Ks they guarantee	Partners personally liable for the debts of the business—arguably more risky than SP bc also liable for acts of other partners & bc are fragile	Liability of owners (“members”) is limited – not liable for debts of the business	Ltd. Partners are exempt fr liability for debts of firm General Partners are not exempt from liability for debts of firm Both have ltd. liability for tortious acts of other partners	(1) Full Shield States: offer protection fr liability for debts of the business & acts of others (2) Partial Shield States: ltd. liability which shields partners fr vicarious liability for the acts of others, but not debts of business
Taxes	Flow-thru Taxation	Double Taxation	Net income fr business is TI to the SP	Flow-Through	Flow-Through, UNLESS an election is made to be treated as a corporation	Flow-Through	Flow-Through
Exiting	Sale of Shares	Sale of Shares	Easy – only 1 person	Can exit whenever (subject to K), but cashing out can be difficult if nobody interested in buying Usually contractual buyout arrangements w/fellow partners	Doesn’t have to cause a dissolution of the LLC	More confined Under many statutes, LPs are entitled to a return of their capital after some period after giving notice of withdrawal, unless p’ship agreement specifies otherwise	Same as GP – can exit at any time, but may be difficult cashing out – usually contractual buying arrangements w/fellow partners
Self-Employment Taxes	S/H in S Corp only pays SE taxes on the portion of the income that’s attributable to services & any amt in excess of that is considered a return on your investment & is not subject to SE tax	Taking out salary in C Corps is subject to self-employment taxes, so would want to pay out dividends instead	A partner’s distributive share of income fr. a p’ship constitutes earnings fr self-employment	A partner’s distributive share of income fr. a p’ship constitutes earnings fr self-employment Want to fit into limited p’ship exception	GR: Not going to be treated like a limited partner & will have to pay SE taxes Subj. to SE taxes on the income IF 1 of 3 things: (1) have personal liability for the debts of LLC (2) have authority to K OBO LLC, or (3) participate in the bus of the LLC >500 hrs during taxable yrs	LPs are generally not subj. to SE taxes GP under state law is exposed to SE taxes
Sale of Assets	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds	Worst option b/c of dbl tax, but is mitigated	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds	Gains realized on sale of the assets are taxed to the owners in proportion to their interests in the business, & after those taxes are pd the owners pocket the net proceeds
Accumulated Earnings	DO increase basis	Do not increase basis (taxable gain can be huge then)	DO increase basis	DO increase basis	DO increase basis	DO increase basis	DO increase basis
Diff. Ownership Interests	Very little flexibility—can only have 1 class of stock! Only voting & non-voting common stock	Can offer diff types of common & preferred stock		Can customize & define diff interests in the operating agreement	Offer most flexibility: member-managed vs. mgr.-managed Can customize & define diff interests in the operating agreement	Offer most flexibility – Ltd Partners vs. General Partners Can customize & define diff interests in the operating agreement	Can customize & define diff interests in the operating agreement
Earnings Bailout	Not a problem	Problem!! C Corp bails out its earnings by distributing them to its S/Hs as dividends, which the corp pays a tax on & is taxed again at S/H level. BUT – could restructure as salary & be deductible to C Corp Toiler & Prof. Service Orgs	Not a problem	Not a problem	Not a problem	Not a problem	Not a problem
Conversion Ability		Ltd. Options – if converts to p’ship or LLC, a gain on the liquidation of the corp will be triggered at corp & S/H levels Can convert into S Corp b/c doesn’t auto trigger such gain
Bracket Racket		C Corps that aren’t Pers. Service Corps have a tiered graduated rate Businesses who are not pers. Service orgs should consider the lower C Corp rates to help service debt, inventories, etc.
Control Rights	Provide best control opportunities bc in a corp you can be the sole member of the bd. of directors & the majority S/H who runs the corp	Provide best control opportunities bc in a corp you can be the sole member of the bd. of directors & the majority S/H who runs the corp	Not an issue	Control rights must be spelled out in the operating agreement	Control rights must be spelled out in the operating agreement	Can put most of the control in the General Partner
Passive Activity Rules	In order to offset passive income w/passive losses, must pass material participation standard ea. individual owner	May offset its active business income w/passive losses	In order to offset passive income w/passive losses, must pass material participation standard ea. individual owner	In order to offset passive income w/passive losses, must pass material participation standard ea. individual owner	In order to offset passive income w/passive losses, must pass material participation standard ea. individual owner	In order to offset passive income w/passive losses, must pass material participation standard ea. individual owner	In order to offset passive income w/passive losses, must pass...

#8758 - Law And Business Entity Chart Breakdown - Law and Business Planning

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