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Sole-Proprietorship
Partnership
o General Partnership
o Limited Partnership
o Limited Liability Partnership
Limited Liability Company
Corporation
o Subchapter C
o Subchapter S
o Professional
Advantages
o Ease and cost of formation
o No shared control
o Not subject to double taxation (personal rates)
o Easier record keeping (no balance sheet on tax)
o Large sphere of activity
Disadvantages
o Unlimited personal liability
o Limited life
o Limited access to capital
o Higher personal tax rates?
Limited Partnership
At least one general partner, multiple limited partners. Corporation can be the
general partner.
Advantages
o Limited liability of the limited partners.
o No double taxation.
o Often used for tax shelters (loss pass-throughs).
Disadvantages (limited partners can not):
o Be active in the operations of the company.
o Have name in the company name.
Limited Liability Partnership
Basically, the same as a Limited Partnership, but there need not be a general
partner and all partners can be active in the business
Advantages
o Limited liability of all partners.
o No double taxation.
Disadvantages (limited partners can not):
o Tax on undistributed income
Limited Liability Company (LLC)
Advantages
o Taxed exactly like partnership (files partnership tax return) unless it elects
to be taxed as a corporation.
o Limited liability of all members.
o Can be active in business and name in company.
Disadvantages
o Not recognized in all 50 states (Texas does).
o Limited life.
o Tax on undistributed income.
o Subject to franchise tax.
o Difficult ownership transfer.
Advantages
o Limited liability of shareholders (personal guarantees?).
o Perpetual life.
o Ease of ownership transfer.
o Ability to raise capital.
Disadvantages
o Cost and difficulty of formation.
o Double taxation on dividends.
o Franchise tax and state income taxes.
o Foreign corporation fee in each state.
S Corporations
Operating Losses
o C Corp must carry NOL back 2 years, then forward 20 years.
o S Corp passes losses through to shareholders (pro rata) and losses taken
at individual level subject only to sufficient basis (investment) in the
company.
S Corp is good for start-up companies expecting a loss the first year.
Operating profits
o C Corporation is subject to Corporate tax and any dividends distributed
are then subject to individual taxes (double taxation).
S Corporation allocates the income (prorata) to the shareholders who are
taxed at their individual tax rates (no double taxation but can be taxed on
undistributed income).
Individual tax rates may be higher or lower than corporate tax rates.
o
Advantages of S Corps.
Avoid Double Taxation if income is intended to be distributed.
Shareholders may have lower (or higher) personal tax rate than corporate rates.
Big tax break if corporate assets are sold.
Take low salary and let income be higher to minimize SS and Medicare taxes.
C Corporations
Can avoid double taxation by:
Paying bonuses to owner/officers and driving corporate income to $0
o excessive compensation rules.
o social security and medicare tax on wages.
Never paying dividends.
o accumulated retained earnings tax.
Disadvantages of S Corps.
May be taxed on undistributed income.
Individual rate is higher than corporate rate.
Loss carryforwards or carryback more beneficial to a C Corp. than Individuals.
Built-in Capital Gains.
No preferred stock.
Less favorable employee benefits (health).
Individual Tax Rates 2011
Marginal Tax
Rate
10%
15%
25%
28%
33%
35%
Married-Joint
Income Level
$0 to $17,000
$17,000 to $69,000
$69,000 to $139,350
$139,350 to $212,300
$212,300 to $379,150
Over $379,150
Single
Income Level
$0 to $8,500
$8,500 to $34,500
$34,500 to $83,600
$83,600 to 174,400
$174,400 to $379,150
Over $379,150
Professional Corporations
A professional corporation is a business organization which allows
"professionals" to practice in an association of individuals which offers many of the
benefits of a for profit corporation. A professional corporation must be organized for the
sole purpose of rendering professional services and may only be formed by eligible
professionals, a term that can vary from state to state (usually, professional occupations
such as doctors, chiropractors, lawyers, dentists, accountants, architects, or engineers).
All shareholders in the corporation are required to be licensed to render the specific
professional service of the corporation. For example, in a medical professional
corporation, all the shareholders must be licensed physicians.
Unless the articles of organization specify otherwise, the liability of shareholders
in a professional corporation is limited in the same manner and to the same extent as
that of a for profit corporation. The Professional Corporation Act does not modify the duty
of care owed to a person receiving services from a professional practicing in a
professional corporation. In other words, professionals practicing in a professional
corporation remain liable for their own malpractice.
Points to Consider
Business Insurance
Liability
Auto
Property / Casualty
Medical (HMO, PPO)
Life & Disability (key man insurance)
Business Interruption
Fidelity and Surety Bonds
Section 1244 Stock
Both C and S Corporations can elect to issue. Can be common stock or
preferred stock.
No Disadvantages. All corporations who meet the requirements should elect.
Converts losses on the transfer of 1244 stock from capital losses to ordinary
losses.
o Not required to offset against preferentially taxed long-term capital gains
(LTCG max tax rate is 15%).
o Not limited to $3,000 deduction against ordinary income (long term capital
losses (LTCL) in excess of LTCG are limited by law to $3,000 per year.
Maximum write-off as ordinary income is $50,000 single/$100,000 joint or the
amount basis, whichever is less. Excess investment is treated as a LTCL.
If stock is transferred at a gain, then LTCG tax treatment applies (15% max. tax
rate) and the purchaser owns regular stock.
Section 1244 Requirements
Original Investor buy stock from Corporation (or in exchange for asset transfer).
Individual Stockholders No Corp shareholders.
Domestic Corporation.
Less than 50% passive income over five years.
Less than $1,000,000 raised from 1244 issue.
No prior issues of stock outstanding.
No warrants, rights or options outstanding.
Section 1202 Stock
Qualified Small Business Stock, held for 5 years or longer, pays only 50% of the
LTCG at a tax rate of 28% (or an effective 14% tax rate on the total gain). Stock
issued between Feb. 17, 2009, and Jan. 1, 2011, has a 75% exclusion.
Maximum issuance is $10 million.
Currently, the LTCG rate is 15% for those in a regular tax bracket of 25% or
more, thus 1202 stock taxed at an effective 14% is only marginally better.
Great for Venture Capitalists who have a 5-year holding period.
SCOR Offering
Small Corporate Offering Registration
o Exempt from federal SEC registration.
o Register the stock with Form U-7 with the State Security Board.
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