Choice of Entity in a Changing World By Phil Jelsma Accounting Day May 16, 2007

Limited Liability Companies Every State has an LLC Act California does not permit professional LLCs No two LLC Acts are alike, there is a new Uniform LLC Act Tax allocations must have substantial economic effect. All the complexities of Subchapter K apply An LLC is not an LLP, which is not an LLLP California’s gross receipts fee is undergoing increasing scrutiny in light of Northwest Energetic Services and Ventas Finance I.

General Partnerships or Joint Ventures Easy to form - no State filing requirements Governed by Revised Uniform Partnership Act (“RUPA”). Cal. Corp. Code Section et seq. Can be created inadvertently two or more persons conducting a business for profit by Section Requires a partnership tax return, Form 1065.

Disadvantages Joint and several liability, Section RUPA creates a buyout for dissociated partner by partnership greater of liquidation value or going concern value unless eliminated by partnership agreement Automatically terminates with 1 partner Limited Liability Partnerships only available to accountants, attorneys, and architects Can restrict ability to do exchange by individual partners

LLP A limited liability partnership is a general partnership electing out of criterias liability In California LLLPs are only permitted if engaged in providing legal services, accounting services or architectural services

Limited Partnerships – LPs - Advantages Easy to form – 1-page filing signed by general partners Existing Act has been modernized by Re-RULPA, effective in No fiduciary duties for limited partners Low California tax burden - $800 Clear self-employment tax treatment – generally limited partners do not pay self-employment tax on distributive share of income

Limited Partnerships – Disadvantages General partner liability – can be addressed by use of LLCs No Revised Limited Liability Limited Partnership treatment in California Management is very structured Requires two owners

LLLP A limited liability limited partnership is a limited partnership where the general partner has elected out of vicarious liability, these are not permitted under California law

S Corporations - Advantages Can be created without shareholders Treated the same as other corporations Can control self-employment taxes Can hold contractors and real estate licenses Familiar to most clients Can have single owner

S Corporations – Disadvantages $800 franchise tax plus 1-1/2% net income tax Must file and maintain S corporation status No step-up on death or sale of shares Tax consequences on distributions of appreciated property or liquidation

Delaware Statutory Trusts (DST) Advantages Recognized as grantor trust in Rev. Rul passthrough treatment without partnership Use in tenancy in common transactions – single borrower, multiple owners and liability protection

DSTs – Disadvantages Not recognized in California Can’t deal with financing problems or tenant defaults Trustee’s powers are very limited Generally requires master lease or single tenant property