Entity Types and Why it is Such an Important Decision Entity Types and Why it is Such an Important Decision Brian Miller Miller Grossbard Advisors, LLP Business Advisors / Certified Public Accountants Certified Valuation Analysts

Issues in choosing the right entity Organizers of a new business enterprise must decide upon the most beneficial legal and tax structure for that venture. Organizers of a new business enterprise must decide upon the most beneficial legal and tax structure for that venture. They should choose the entity form that provides both (1) the greatest income tax planning benefits and (2) business planning opportunities. They should choose the entity form that provides both (1) the greatest income tax planning benefits and (2) business planning opportunities.

Basic business entity forms can include Partnerships Partnerships C Corporation C Corporation S Corporation S Corporation LLC LLC

General Partnership General information General information Unincorporated entity with at least two owners Unincorporated entity with at least two owners Ownership is in the form of units, shares or percentages Ownership is in the form of units, shares or percentages No limit on number of partners No limit on number of partners No restrictions on kinds of owners that can be partners No restrictions on kinds of owners that can be partners Liability protection Liability protection A general partnership is nominally responsible for own debts. General partners are also personally responsible for all partnership recourse debt A general partnership is nominally responsible for own debts. General partners are also personally responsible for all partnership recourse debt

General Partnership (continued) Taxation Taxation A general partnership does not pay tax A general partnership does not pay tax Partners are taxed directly on their partnership-level income Partners are taxed directly on their partnership-level income General Partner is subject to self-employment tax General Partner is subject to self-employment tax Partners can deduct losses recognized at the partnership level Partners can deduct losses recognized at the partnership level Estate planning Estate planning An interest in a partnership may be valued at a discount to the value of assets owned by the partnership. Discounts in a general partnership are not as deep as those for corporations, limited partnerships or limited liability companies An interest in a partnership may be valued at a discount to the value of assets owned by the partnership. Discounts in a general partnership are not as deep as those for corporations, limited partnerships or limited liability companies

Limited Partnership General information General information Same as General Partnership Same as General Partnership Liability protection Liability protection Limited partners are generally not liable for debts of partnership, but they must restrict participation in management or risk loss of limited liability Limited partners are generally not liable for debts of partnership, but they must restrict participation in management or risk loss of limited liability Taxation Taxation Limited partnership does not pay any tax Limited partnership does not pay any tax Partners are taxed directly on their partnership-level income Partners are taxed directly on their partnership-level income Generally limited partners can deduct losses recognized at the partnership level only if they have other passive income Generally limited partners can deduct losses recognized at the partnership level only if they have other passive income

Limited Liability Partnership General information General information Hybrid entity that confers partial limited liability to its members Hybrid entity that confers partial limited liability to its members Can choose to be taxed either as a corporation or partnership Can choose to be taxed either as a corporation or partnership Created under state law by registering under a state LLP statute Created under state law by registering under a state LLP statute

C Corporation General information General information Organized under state statute Organized under state statute Ownership is in the form of stock Ownership is in the form of stock No limit to number or type of shareholders No limit to number or type of shareholders No limit on number of classes of stock No limit on number of classes of stock Liability protection Liability protection Corporation owns its assets and is liable for its debts Corporation owns its assets and is liable for its debts Shareholders are not liable for corporate debts Shareholders are not liable for corporate debts

C Corporation (continued) Taxation Taxation A C Corporation is taxable on the income it earns A C Corporation is taxable on the income it earns Taxed at graduated rates like an individual Taxed at graduated rates like an individual Shareholders are taxed on dividends from corporation Shareholders are taxed on dividends from corporation Estate planning Estate planning Same as a general partnership Same as a general partnership

S Corporation General information General information US corporation that elects to be treated as a pass- through US corporation that elects to be treated as a pass- through Ownership is in the form of stock Ownership is in the form of stock Can have no more than 100 shareholders and only one class of stock Can have no more than 100 shareholders and only one class of stock Eligible shareholders include: Eligible shareholders include: Individuals Individuals Certain estates, trusts and other S corporations Certain estates, trusts and other S corporations

S Corporation (continued) Liability protection Liability protection Same as C Corporation outlined above Same as C Corporation outlined above Taxation Taxation Not taxable on the income it earns Not taxable on the income it earns Shareholders are taxed on corporate level income regardless of whether that income is distributed Shareholders are taxed on corporate level income regardless of whether that income is distributed Estate planning Estate planning Same as C Corporation outlined above Same as C Corporation outlined above

Limited Liability Company General information General information Hybrid entity that is treated like a corporation for liability purposes, but for tax purposes can choose to be taxed as a corporation or partnership Hybrid entity that is treated like a corporation for liability purposes, but for tax purposes can choose to be taxed as a corporation or partnership Created under state law by statute Created under state law by statute Taxation Taxation Taxed under the same rules as those of a general partnership if elected or in the same manner as a corporation Taxed under the same rules as those of a general partnership if elected or in the same manner as a corporation

Issues to consider when choosing an entity Type of assets to be owned by business Type of assets to be owned by business Working capital needs Working capital needs Multi-state operations Multi-state operations Carried interests Carried interests Start up losses Start up losses Special allocations required Special allocations required Distributions Distributions Permissible shareholders Permissible shareholders Owner salaries Owner salaries