Presenter: Christopher M. Pacheco, Esq. Shareholder Lastrapes, Spangler & Pacheco, P.A.

Types of Business Organizations: Legal Requirements/Regulations

 What is involved in setting up each type of organization, do I need legal assistance or can I do it myself?  Who will own and control the business?  What is the personal liability associated with each business type?  What is the duration and how easily can each business type be transferred?  What are the potential tax consequences and applications?

 One person is owner/manager, assets owned by owner  All profits and losses to the owner  Owner personally liable  No regulatory filings to establish the entity  Single tax return, with owners federal/state return, tax paid by owner on personal return Don’t forget:  Maintain separate personal/business bank accounts and complete accurate business records  If hiring employees, don’t mistake simple for informal, have written handbook, job descriptions and duties

Pros  Simple (no formation requirement)  Low to no entity start up costs  Your own boss  No double taxation, passes through owner Cons  Unlimited personal liability

 Two or more owners, assets owned by partnership  Each partner participates in management decisions  Each partner liable jointly and severely  No regulatory filings to establish the partnership  Two tax returns, partnership and personal, tax paid by individual partners on personal return Don’t forget:  Have a written partnership agreement although it may not legally be required  Keep business and partners bank accounts and complete accurate business records

Pros  Simple (no formation requirement)  Low to no entity start up costs  Can establish the duties and obligations of each partner via a partnership agreement  No double taxation, partnership return is required for information only Cons  Unlimited joint and several personal liability ◦ you are responsible for what your partner does on behalf of the partnership even if you do not agree  Dissolves if partner dies or leaves the partnership (unless partnership agreement otherwise provides)

 Two or more owners, assets owned by partnership  At least one general partner and one or more limited partners  Management in the hands of the general partner  Profits shared in relation to investment or agreement  General partner has full liability, limited partner is generally shielded  A regulatory filing is required to establish partnership  Two tax returns, partnership and personal, tax paid by individual partners on personal return

Pros  Limited liability for limited partners  Written partnership agreement outlines the terms and conditions of the partnership relationship  Partnership survives as long as the partners agree it will  No double taxation, partnership return is for information only Cons  Must be formally formed with state ◦ Although simple it does create an expense  Must ensure limited partnership follows regulatory requirements to ensure the limited partners are shielded from personal liability

 One or more owners (shareholders)  Management by a board of directors elected by Shareholders, officers elected by the board  Profits share by dividends  Shareholders not personally liable (unless guaranteed)  A regulatory filing is required to establish corporation  A tax return is required at the corporate level, the corporation pays the taxes

Pros  Shareholders are shielded from personal liability  Written bylaws governing the corporation specifically forth how the corporation will be operated  Perpetuity Cons  Must be formally formed with state  All formal requirements such as annual meetings and/or annual reporting must be diligently followed to maintain the shield of personal liability for the shareholders  Double taxation – shareholders pay taxes on dividends and corporation pays taxes

 One or more owners (shareholders)  Management by a board of directors elected by Shareholders, officers elected by the board  Shareholders not personally liable (unless guaranteed)  A regulatory filing is required to establish corporation  An election is made not to be taxed as a corporation, taxes are paid by the shareholders in proportion to their ownership share of income or gain regardless of any cash distribution (such as dividends)

Pros  Shareholders are shielded from personal liability  Written bylaws governing the corporation specifically forth how the corporation will be operated  Perpetuity  No double taxation – the corporation does not pay separate taxes Cons  Must meet IRS criteria  Limits on types of shareholders  Must be formally formed with state  All regulatory requirements such as annual meetings and/or annual reporting must be diligently followed to maintain the shield of personal liability for the shareholders  Shareholders may be required to pay tax on the corporate earnings even if no dividends are paid

IRS Subchapter S criteria: 1. Corporation has < 75 shareholders 2. Corporation has one class of stock 3. All shareholders must be U.S. residents 4. All shareholders must be individuals 5. Corporation operates on a calendar year basis

 Provides limited liability of members (owners)  One or more owners  Management structures vary – officers are optional and formalities of a corporation are not required  Members generally not personally liable (unless guaranteed)  Taxes may be filed as a corporation, and taxes paid by the corporation, or like a partnership and paid by the partners, and partners may be classified as active or passive and taxed differently

Pros  Members are shielded from personal liability  Fewer formalities than corporation  Operating Agreement controls governing of LLC, unlike corporation its optional to have officers, etc.  Usually no double taxation – can elect to have pass through to Members (taxed as partnership) Cons  Must be formally formed with state  Although minimal there are regulatory requirements to maintain the shield of personal liability for the members

 Proprietorship  General Partnership  Limited Partnership  C-Corporation  S-Corporation  Limited Liability Company

Questions?