1. Coni S. Rathbone crathbone@rbolawpc.com
Creative Structuring
Coni S. Rathbone

2. Choices, Choices, Choices
C Corporation S Corporation Limited Liability Company ) Limited Partnership ) all taxed the same Partnership )

3. Entity Selection Corp vs. LLC
Primary Concerns
Limited Liability
Levels of Taxation
Self Employment Tax
Management flexibility
Distributing Appreciated Assets to Owners

4. ENTITY CHARACTERISTICS
C Corp LL- 2 levels tax – No SET problem
Flexible – “Deemed Sale”
S Corp LL- 1 level tax – No SET Problem
Not Flexible – “Deemed Sale”
LLC LL- 1 level tax – Probable SET Problem Flexible – “No Deemed Sale”
LP LL for LP only – 1 level tax – Probable SET Problem – Flexible – “No Deemed Sale”
Partnership LL – 1 level tax – Probable SET Problem Flexible – “No Deemed Sale”
*LLC taxed as partnership so other entities – Partnership, LP, etc. – treated same
Exceptions Galore

5.    LP Partnership Limited liability S Corp or LLC C Corp
OUT
C Corp
2 levels tax  LP
Limited liability
for LP only
OUT 
OUT
Partnership
No limited liability
Of course, there are reasons to use them!
The Real Choice for most of your purposes …..
S Corp or LLC

6. *Not Settled Area of Law as to LLCs
Self-Employment Tax Profitable Operating Business (i.e., profits to allocate)
LLC
Member salary – SSI
Member Probably taxed on
SET on Allocations
(manager exceptions)
(some exclusions, i.e., rent & interest)
S Corp
Shareholder salary – SSI
Shareholder NO SET on Allocation
1 level tax
Probable SET
1 level tax
No SET  
1 Good
5 Bad
*Not Settled Area of Law as to LLCs

7. Appreciated Property Distribution
Real Property Holding Company
Timing Issue
RP purchase price $10K
FMV $50K
Appreciation $40K
LLC
“No Deemed Sale”
Distribute RP to Member, carry over basis, no sale
No effect on basis of LLC interest or asset. When Member sells asset to 3P taxed on gain at the time of cash event (appreciation trapped in asset)
C Corp
“Deemed Sale”
Distribute RP to Shareholder = $40K Gain
Corp pays tax on gain now,
No cash event
(appreciation trapped in corp)
S Corp
“Deemed Sale”
Distribute RP to Shareholder = $40K Gain
Flows thru to Shareholder
Shareholder pays tax on gain now, No cash event
But: Shareholder gets stepped up basis in Property and in Stock (appreciation trapped in Shareholder)
10 Bad
5 Bad
1 Good   

8. To Keep Lawyers in Business
Basic Rule:
Profitable Operating Business S Corp best usually because no SET Problem
Appreciating Assets Holding Business LLC best because no Deemed Sale
Of course, always exceptions
To Keep Lawyers in Business

9. (i.e., appreciating asset)
So ….
For Real Property
(i.e., appreciating asset)
LLCs Rule!

10. Limited Liability Companies
No Owner Restrictions
Perpetual Duration/Fixed Termination
Manager or Member Managed
Flow through taxation
Check the box:
Corporate
Partnership
Individual
Totally Flexible Entity

11. Ownership Members Percentage Interests
Interest is “Personal Property” like stock
Typically Significant Restrictions on Transfer

12. Management By All Members By Managers Appointed or Voted on by Members
Based on vote of percentage interest
All Members have apparent authority to bind company
By Managers Appointed or Voted on by Members
Members only vote on Manager/Manager runs company
Certain actions reserved to Members
Only Managers have apparent authority to bind company

13. Tax/Accounting No entity level taxation
Profits and Losses allocated to Members
Distributions of excess cash to Members
Distributions vs. Allocations

14. The Basics: Straight Asset Contribution for Liability Separation/Asset Protection
Joe Developer
100% Ownership Interest
Canby Property
Albany Property
100% Ownership Interest
LO Property
100% Ownership Interest
100% Ownership Interest
Salem Property
Canby LLC
LO LLC
Albany LLC
Salem LLC
Bankruptcy of Salem LLC does not put at risk Canby Property
Income/Profit of Canby LLC still flows through to Joe Developer

15. Protection from Other Owners
DOC A
MEMBERSHIP $1
DOC B
MEMBERSHIP $1
DOC C
MEMBERSHIP $1
DOC D
MEMBERSHIP $1
Doctor A LLC
Doctor B LLC
Doctor C LLC
Doctor D LLC
Cash for Ownership
Cash for Ownership
Cash for Ownership
Cash for Ownership
Building LLC
- Cash Contribution represents extent of each Doctor’s risk
- Income/Profit of Building LLC flows through to each Doctor LLC & then to each Doc
- Bankruptcy of Doctor A does not put at risk the Building LLC

16. Real Property Separation from Operating Business
Owner
Business Assets
100% Ownership Interest
Real Estate Assets
100% Ownership Interest
Lease
Manufacture-Co S Corp
Manufacture Building LLC
Protects Real Property from liability of operating business
Profits and losses all still flow to Owner

17. Now . . .
Let’s get Creative!!!

18. A Case Scenario - Meet Bob Smith and Denny Jones
Two partners want to buy a farm, own it 50/50, and qualify for as many CRP contract payments as possible. The farm qualifies for $500K in annual CRP contract payments. They want liability protection in the structure they create. Smith has four kids, Jones has two. Smith and Jones want to keep control of operations.
CRP limits amount each owner can receive annually - $50,000.
Each owner must have joint and several liability.
Farm qualifies; Owners qualify!
The Solution
Form a General Partnership to buy the farm consisting of ten (10) Limited Liability Companies.

19. Farm Partnership 101 Farm Partnership $500K CRP Mr. Smith LLC $50K CRP
8.4%
Mrs. Smith LLC $50K CRP
Smith Family 1 LLC $50K CRP
8.3%
Smith Family 2 LLC $50K CRP
Smith Family 3 LLC $50K CRP
Smith Family 4 LLC $50K CRP
Mr. Jones LLC $50K CRP
12.5%
Mrs. Jones LLC $50K CRP
Jones Family 1 LLC $50K CRP
Jones Family 2 LLC $50K CRP
Member Managed
Mr. Smith
only member
8.4%
Mrs. Smith
Manager
Managed
Kid 1 -
99% member
Mr. Smith -
1% member
& manager
Kid 2 -
Kid 3 -
Kid 4 -
Mr. Jones
12.5%
Mrs. Jones
Mr. Jones -
Votes in Partnership
Mr. Smith Votes 41.6% Mr. Jones Votes 37.5%
Mrs. Smith Votes % Mrs. Jones Votes 12.5%
50.0% %

20. Smith & Jones $400K Left on the table! ØØØ Left on the table!
Farm Partnership 101
Mr. Smith LLC $50K CRP
Mrs. Smith LLC $50K CRP
Smith Family 1 LLC $50K CRP
Smith Family 2 LLC $50K CRP
Smith Family 3 LLC $50K CRP
Smith Family 4 LLC $50K CRP
Mr. Jones LLC $50K CRP
Mrs. Jones LLC $50K CRP
Jones Family 1 LLC $50K CRP
Jones Family 2 LLC $50K CRP
Total Max Annual CRP Payments -
$500K
Bob Smith $50K CRP
Denny Jones $50K CRP
Total Max Annual CRP Payments -
$100K
$400K Left on the table!
ØØØ Left on the table!

21. A Typical Development Structure
A Partnership = Larry, Mo, Curly
$$$
Undeveloped Property
(Capital Asset)
A Partnership
$1M Basis
Subdivided Property
(Dealer Property)
A Partnership
3P Purchasers
$8M Sales Price
Total Gain on Sale = $7M
Ordinary Income Tax Rate 38%
Tax 2,660,000
Net Gain 4,340,000

22. A Better Solution A Partnership = Larry, Mo, Curly
XYZ S Corp = Larry, Mo, Curly & Larry’s Wife
Note
$$$ $
Undeveloped Property
(Capital Asset)
Partnership
$1M Basis
Capital gain
Subdivided Property
(Dealer Property)
*XYZ S Corp
$7M Sales Price
Supported by Wholesale MAI
Deed
3P Purchasers
$8M Sales Price
Ordinary gain
Many
Deeds
Gain = $6M Gain $1M
Capital Gain Rate 15% Ordinary Income Rate 38%
Tax 900, Tax 380,000
Total Gain 7,000,000
Total Tax 1,280,000
Net Gain 5,720,000
*S Corp because of related party rules
*What is reason for structure besides tax?
Partnership Liability, Shield of development liability

23. Adding it All Up A Partnership - XYZ S Corp A Partnership
Total Capital Gain 6,000,000
Tax ,000
Total Ordinary Income Gain 1,000,000
Tax ,000
Total Gain 7,000,000 Total Tax 2,660,000 Net Gain 4,340,000
Total Gain 7,000,000
Total Tax 1,280,000
Net Gain 5,720,000
====
Total Tax Savings: $1,380,000
====
====

24. Asset Transfer, Value Discount
Mom and Dad own or want to buy $5,000,000 RP in Portland
Goals:
Want to retain ownership of a major part of their estate
Minimize tax upon eventual transfer to children
Keep control
Reallocate income tax liability

25. Solution: Create Manager Managed LLC
Contribute property to LLC in exchange for majority ownership interests
Minority ownership interest to kids
Later transfer (gift) majority of LLC (Not Property) to kids

26. LLC Characteristics Manager managed, both parents managers
Unanimous vote to change managers
Unanimous vote required to transfer ownership interest
Profits and losses allocated in accordance with ownership interests

27. Property Portland Property LLC Mom Dad Son Daughter
49%
Portland Property LLC
Mom
Dad
Son
Daughter
$1,000 1%
Parents each contribute their ownership interests in Portland Property to LLC for 49% ownership interest in LLC Son contributes $1,000 cash to LLC for 1% ownership interest in LLC Daughter contributes $1,000 cash to LLC for 1% ownership interest in LLC

28. Appraisal Value of LLC
Not the same as value of its assets because entity ownership affected by other factors
Asset contributed valued at $5,000,000
20% discount for lack of marketability (restrictions on transfer) of LLC Interest
35% discount for lack of control (manager managed) of LLC Entity
(These are based on empirical evidence available to appraiser)
Value of Assets Contributed to Company $5,000,000
Total: 55% Discount
$5,000,000 x Total Value of Company
$2,250,000

29. Transfer to Kids Gift 48% Mom Dad Son Daughter 49% 1% 1% 49%
Portland Property LLC
Gift 48%
48% value is $1,080,000
Result
Son = 49%
Daughter = 49%
Mom = 1%
Dad = 1%
Mom & Dad still Managers, so still in control
Cannot be changed without their vote
Profits & Loss of LLC now taxed at lower kid’s rate

30. Tax on Gift of LLC Ownership Interests to Kids
Mom to Daughter
Value $1,080,000
Mom’s
exemption $1,000,000
Gift Tax Rate Total ,000
41% Tax $32,800
Dad to Son
Value $1,080,000
Dad’s
exemption $1,000,000
Gift Tax Rate Total ,000
41% Tax $32,800
Total Tax on Transfer
$65,600
Total Tax on Transfer $65,600

31. Gift of Property/Tax Without LLC
Mom and Dad gift jointly to son and daughter
$5,000,000
IRS 15% fractional
interest discount ,000
$4,250,000
Mom and Dad’s exemptions 2,000,000
Taxable $2,250,000
41% ,500
Total tax on transfer $922,500

32. Gift to Kids IRS Hates this Structure!
Of LLC Interest Of Real Property
$65, $922,500
IRS Hates this Structure!

33. Coni S. Rathbone, J.D., CRE crathbone@rbolawpc.com
4949 Meadows Road, Suite 600
Lake Oswego, OR 97035
Direct:
Office:
Cell:
Rbolawpc.com
Disclaimer
No legal or other professional advice is expressed or implied by any of the presenters or in this written material. All parties are urged to seek competent legal advice before making any decisions concerning their particular issue. Special circumstances may cause different outcomes compared to those shared by presenter. Each case must be evaluated on its own unique facts and the applicable rules of law.