1. NATHAN J. DOSCH GRANT THORNTON, LLP THANKS TO JOE BOUCHER AND NEIDER & BOUCHER, S.C. 10-27-2011 Burrill Competition 2012 Business Entities

2. Business Entities 2 Factors  Limited Liability  Tax Treatment  Piercing the Veil  Asset Seizure 10-27-2011

3. Business Entities 3 Owner Business Entity Other 3 rd Party Customer Vendors LandlordBank Tax Accountant Employees 10-27-2011

4. Business Entities 4 Holding Co. Business Entity Other 3 rd Party Customer Vendors LandlordBank Tax Accountant Employees Owner 10-27-2011

5. Entity Selection 5 Limited liability  A n owner can still lose all of his/her investment.  The owner is always personally liable for his or her own actions.  Issue: extent to which the owner personally has exposure to the debts and obligations of the entity beyond his/her investment. 10-27-2011

6. Entity Selection 6 Limited liability  Sole Proprietorship  Unlimited liability of owner  Operating Division of Company  Unlimited liability of owner (entity, not owners of entity) 10-27-2011

7. Entity Selection 11/11/2010 7 Limited liability  Corporations  Regular Corporations. Wis. Stats. §180.0622: “... a shareholder of a corporation is not personally liable for the acts or debts of the corporation, except that a shareholder may become personally liable by his or her acts or conduct other than as a shareholder.”  Must be “adequately capitalized” and must maintain corporate formalities (Board meetings, shareholder votes, etc.)

8. Entity Selection 11/11/2010 8 Limited liability  General Partnerships: Wis. Stats. §178.12(1): “(a) Jointly and severally for [wrongful acts or breaches of trust by a partner]. (b) Jointly for all other debts and obligations of the partnership...”

9. Entity Selection 11/11/2010 9 Limited liability  Limited Partnerships:  General Partner: Wis. Stats. §179.33: “... a general partner of a limited partnership has all of the liabilities of a partner in a general partnership...”  Limited Partner: Wis. Stats. §179.23: “... a limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or... he or she participates in the control of the business....”

10. Entity Selection 10 Limited liability  Limited Liability Company: Wis. Stats. §183.0304: “... a member or manager of a limited liability company is not personally liable for any debt, obligation or liability of the limited liability company, except that a member or manager may become personally liable by his or her acts or conduct other than as a member or manager.” 10-27-2011

11. Entity Selection 11 Limited liability  Limited Liability Partnership: Wis. Stats. §178.12(2): “a partner... is not personally liable directly or indirectly, or by way of indemnification, contribution, assessment or otherwise, for any debt, obligation or liability of the partnership, whether in tort, contract or otherwise, and including any debt, obligation or liability arising from omissions, negligence, wrongful acts, misconduct or malpractice...” 10-27-2011

12. Entity Selection 12 Limited liability  Illusory Nature of Limited Liability  Many creditors require personal guarantees of owners  Some statutory exceptions such as for trust fund taxes  Owners may not be liable as owners, but are liable for their own actions 10-27-2011

13. Entity Selection 13 Tax Treatment  LLC, LLP, LP all disregarded by IRS for tax purposes  Entities taxed either as sole proprietorship, partnership, or corporation  Corporation  All can be taxed under Subchapter C of Internal Revenue Code Internal Revenue Code  Most can be and are taxed under Subchapter S (2000: 92%) Subchapter S (2000: 92%) 10-27-2011

14. Entity Selection 14 Tax Treatment  Sole Proprietorships and Single Member LLCs  Income and expenses of the business are reported on the owner's tax return (Schedule C, Form 1040) and are taxed at ordinary income tax rates. In addition, the owner is subject to Self-Employment Tax of 15.3%. Partnerships (incl. multi-member LLC’s, etc.)  A general partnership does not pay tax. Partners are taxed directly on partnership-level income regardless of whether that income is distributed to the partners. In addition, the owner is subject to Self-Employment Tax of 15.3%. 10-27-2011

15. Entity Selection 15 Tax Treatment  Corporations  C corporations are taxed on the income it earns. Shareholders are taxed when the corporation distributes income in the form of dividends. C-Corp’s pay 15% - 35% progressive rates and shareholders currently pay a 5 % to 15% rate for qualified dividends (depending on the shareholder's individual income tax bracket)  Generally, S corporation's do not pay tax on income earned. Similar to a partnership, S-Corp shareholders are taxed on corporate-level income, regardless of whether that income is distributed. 10-27-2011

16. Entity Selection 16 Tax Treatment  S-Corp’s  Employed owners set fair salary for themselves  Pay FICA tax on salary (7.65%)  Pay Self-Employment tax on dividends  Requirements < 100 owners (families count as 1) All shares are owned by individuals or qualfied trusts, not by other business entities All shares owned by US citizens or residents Only one class of stock (voting and nonvoting permitted) 10-27-2011

17. Entity Selection 17 Ability to Pierce the Veil  Sole Proprietorship  No need to pierce the organizational veil, because owner is personally liable  Operating Division  No need to pierce the organizational veil, because entity that operates the division is directly liable 10-27-2011

18. Entity Selection 18 Ability to Pierce the Veil  Corporations  Veil can be pierced, but hard to do. It is an “equitable remedy” (judge’s discretion) “not to be dispensed with lightly.”  Courts will look at extent of under-capitalization, formalities (set up of corporation, meetings, use of corporate name, commingling of assets) and extent of personal control exercised. 10-27-2011

19. Entity Selection 19 Ability to Pierce the Veil  Corporations  Statute says cannot pierce veil of statutory close corporation for failure to observe corporate formalities, Wis. Stats. §180.1835  General Partnership  No need to pierce the organizational veil because each partner is personally liable  Limited Partnership  Can pierce the veil and recover from limited partners to the extent they participate in the operation of the business 10-27-2011

20. Entity Selection 20 Ability to Pierce the Veil  LLCs & LLPs  Fewer formalities  Can’t get to owners’ personal income unless they were involved in damaging conduct  LLC- must file annual report 10-27-2011

21. Entity Selection 21 Ability to Pierce the Veil  Other Areas of Potential Direct Liability  Direct personal liability for own actions  “Responsible Person” liability for unpaid taxes  Other parties must be made aware that they are dealing with a limited liability entity. 10-27-2011

22. Entity Selection 22 Ability to Pierce the Veil  Other Areas of Potential Direct Liability  Conspiracy-Anti Trust laws  Securities law Ability of Creditors of Owner to Seize Assets of Entity  Sole Proprietorship  Yes, because not an entity separate from owner 10-27-2011

23. Entity Selection 23 Ability of Creditors of Owner to Seize Assets of Entity  Operating Division  Yes, because not an entity separate from owner  Corporations  Stock is an asset of the shareholder, and may be attached in a judgment  If sufficient control/vote, creditor may be able to dissolve corporation 10-27-2011

24. Entity Selection 24 Ability of Creditors of Owner to Seize Assets of Entity  General Partnerships  Charging order - Wis. Stats. §178.24(1) Court may “charge” the member’s interest with payment of an unsatisfied judgment Only get rights of an assignee of the interest  Foreclosure of interest - §178.24(2)  Limited Partnership  Charging order - Wis. Stats. §179.63 10-27-2011

25. Entity Selection 25 Ability of Creditors of Owner to Seize Assets of Entity  LLCs  Charging order - Wis. Stats. §183.0705  LLPs  No distinction between LLP and a General Partnership Charging order - Wis. Stats. §178.24(1) Foreclosure of interest - §178.24(2) 10-27-2011

26. Entity Selection 26 Other Factors  Extent Understood by External Constituencies  Use of LLCs and LLPs internationally still not widely accepted  IPO’s require use of a C Corporation  Relatively easy to convert from an LLC to a Corporation  More difficult if ownership structure is complicated 10-27-2011

27. Entity Selection 27 Other Factors  Wisconsin Real Estate Transfer Fee  Transfer by members to their LLC or from an LLC to its members is a taxable transfer. Wis. Stats. §77.21 et. seq. Exception if all of members are related to one another and the transfer is for no consideration other than the acquisition of an interest in the LLC. Wis. Stats. §77.25(15s) 10-27-2011

28. Entity Selection 28 Other Factors  Wisconsin Real Estate Transfer Fee  Same rules apply to transfers to and from corporations and their shareholders (Wis. Stats. §77.25(15), but for a transfer from the corporation only if the corporation owned the property for at least three years) and partnerships and their partners (Wis. Stats. §77.25(15m))  LLP’s avoid this cost 10-27-2011

29. Entity Selection 29 Thanks Nathan J. Dosch Grant Thornton LLP www.gt.com (414) 277-6491 Nate.Dosch@us.gt.com 10-27-2011