Other Entity Types: Professional, Close, & Family Corporations
Quick Bites:
- Close and Family Corporations do not exist in all jurisdictions
- They are still taxed as a regular corporation unless an s-election is made.
- Professional Corporation:
- Corporation that is engaged solely in a licensed profession.
- All owners must be licensed professionals
- Close Corporation:
- Small corporation (under a certain number of members set by statute)
- Certain corporate formalities waived
- Family Corporation
- Like a close corporation, but all owners must be relatives.
Limited Liability Partnership (LLP) & Limited Liability Limited Partnership (LLLP)
Quick Bites on Limited Liability Partnerships and Limited Liability Limited Partnerships
- Both these entities provide limited liability to all participants (including the general partners who make decisions)
- LLP = General Partnership
- LLLP = Limited Partnership (even though the Limited Partners already had limited liability, this extends it to the General Partner)
- As a limited liability the entity must be registered with the state
Limited Liability Companies – Part 3
Quick Bites:
- Default Rule is multi-member LLC is taxed as partnership
- Can use Membership Units to express ownership percentage
- Can create Membership Certificates (but have no binding power)
Limited Liability Companies (LLC)
Quick Bites:
- Most flexible of all limited liability entities
- Can choose to be taxed as partnership or corporation (or disregarded if single member)
- Must be registered with the state (like corporations, but not incorporated)
- Company document called Operating Agreement or Company Agreement – depending on jurisdiction.
Corporations – Part 2
Quick Bites:
- Corporations are not “formed” or “certified” they are “incorporated”
- Who makes most of the decisions? Shareholders or directors? ((For small corporations it makes more sense to skip the directorship, if possible in your jurisdiction))
- Corporate Formalities must be followed to ensure limited liability
- Hold annual meetings * Keep minutes of the meetings (signed by the Secretary typically)
- Follow signing requirements in your jurisdiction: oftentimes corporations require two signatures and/or a corporate seal
Corporate Taxation
Quick Bites:
- Double Taxation
- Gains/Losses stay in entity until disbursed
- Allows for incoming timing
- Entire tax code section means there are numerous hidden benefits in addition to the known disadvantages
- Seek a CPA who specializes in corporations/business entities to understand when a corporation (versus other entities) is appropriate
Corporations
The original limited liability business choice. Too large to cover even over the course of a meal. Bites from this video:
- Ownership is represented by stock/shares
- Corporate formalities must be followed
Courts will respect the separation of owners and business if the
owners respect the same. - Bylaws are the company’s governing documents
Taxation of “Limited” Partners / Investors
A quick bite on why it’s better to invest than work. Last week briefly mentioned, but didn’t cover, how limited partners are treated differently for tax purposes from general partners. Today we discuss that income from investments are not required to pay FICA/self-employment tax. This equates to an automatic 7.5/15% increase in the amount of after tax income.
It truly pays dividends to invest.
Limited Partnerships
An option for when a deal doesn’t require the additional paperwork of a statewide filing and provides for limited liability to the limited partners.
- No required statewide filing (Alabama & Georgia)
- 2 tier ownership – General Partners (day to day control)
- Limited Partners (investors and company direction)
- General partners face unlimited liability – same as general partnership
- Limited partners losses are limited to their investment.
- Limited partners are treated differently for tax purposes (not covered today)
- operates like a modified general partnership
General Partnerships
The General Partnership is an easy way to go into business with others, but its ease is also its danger:
- No filing requirements (Georgia or Alabama)
- Unlimited Liability
- Unlimited Power of the Partners to make decisions
- Taxed as a pure passthrough –
- IRS form 1065
- K1 to each partner
- Phantom Income
Good for situations where the partners have already limited their liability in other ways