Choice of Entity in a Changing World

1. Choice of Entity in a Changing World ByPhil Jelsma Accounting Day May 16, 2007

2. Limited Liability Companies • Every State has an LLC Act • California does not permit professional LLCs • No two LLC Acts are alike, there is a new Uniform LLC Act • Tax allocations must have substantial economic effect. All the complexities of Subchapter K apply • An LLC is not an LLP, which is not an LLLP • California’s gross receipts fee is undergoing increasing scrutiny in light of Northwest Energetic Services and Ventas Finance I.

3. General Partnerships or Joint Ventures • Easy to form - no State filing requirements • Governed by Revised Uniform Partnership Act (“RUPA”). Cal. Corp. Code Section 16100 etseq. • Can be created inadvertently two or more persons conducting a business for profit by Section 16202. • Requires a partnership tax return, Form 1065.

4. Disadvantages • Joint and several liability, Section 16306 • RUPA creates a buyout for dissociated partner by partnership greater of liquidation value or going concern value unless eliminated by partnership agreement • Automatically terminates with 1 partner • Limited Liability Partnerships only available to accountants, attorneys, and architects • Can restrict ability to do exchange by individual partners

5. LLP • A limited liability partnership is a general partnership electing out of criterias liability • In California LLLPs are only permitted if engaged in providing legal services, accounting services or architectural services

6. Limited Partnerships – LPs - Advantages • Easy to form – 1-page filing signed by general partners • Existing Act has been modernized by Re-RULPA, effective in 2008. No fiduciary duties for limited partners • Low California tax burden - $800 • Clear self-employment tax treatment – generally limited partners do not pay self-employment tax on distributive share of income

7. Limited Partnerships –Disadvantages • General partner liability – can be addressed by use of LLCs • No Revised Limited Liability Limited Partnership treatment in California • Management is very structured • Requires two owners

8. LLLP • A limited liability limited partnership is a limited partnership where the general partner has elected out of vicarious liability, these are not permitted under California law

9. S Corporations - Advantages • Can be created without shareholders • Treated the same as other corporations • Can control self-employment taxes • Can hold contractors and real estate licenses • Familiar to most clients • Can have single owner

10. S Corporations – Disadvantages • $800 franchise tax plus 1-1/2% net income tax • Must file and maintain S corporation status • No step-up on death or sale of shares • Tax consequences on distributions of appreciated property or liquidation

11. Delaware Statutory Trusts (DST) Advantages • Recognized as grantor trust in Rev. Rul. 2004-86 passthrough treatment without partnership • Use in tenancy in common transactions – single borrower, multiple owners and liability protection

12. DSTs – Disadvantages • Not recognized in California • Can’t deal with financing problems or tenant defaults • Trustee’s powers are very limited • Generally requires master lease or single tenant property