Choosing the Right Business Entity: Tax & Liability Analysis

1. CHOICE OF ENTITY THE TAX DECISION Clare G. Cole CPA Adapted by Massachusetts Small Business Development Center

2. WHAT ARE THE CHOICES? • Sole proprietorship • Partnership • Corporation • Limited liability company or LLP

3. KEY BUSINESS ISSUES • OPERATIONS • HOLDING ASSETS • STAYING SMALL • GOING PUBLIC • ACCESSING CAPITAL

4. KEY DIFFERENTIATORS • PERSONAL LIABILITY PROTECTION • TAX ADVANTAGES • COST • SIMPLICITY

5. SOLE PROPRIETORSHIP • ADVANTAGES • SIMPLE, NO SEPARATE FILING • NO STATE FILINGS • LOSSES PASS THROUGH

6. SOLE PROPRIETORSHIP • DISADVANTAGES • PERSONAL LIABILITY • LIMITED ACCESS TO CAPITAL • SELF EMPLOYMENT TAX

7. GENERAL PARTNERSHIP • ADVANTAGES • SINGLE LEVEL OF TAXATION • LOSSES PASS THROUGH • SIMPLE ADMINISTRATION

8. GENERAL PARTNERSHIP • DISADVANTAGES • PERSONAL LIABILITY • LIABILITY FOR PARTNER’S COMMITMENTS • LIMITED ACCESS TO CAPITAL

9. CORPORATION • ADVANTAGES • LIMITED LIABILITY • ACCESS TO CAPITAL • OWNER BENEFITS DEDUCTIBLE • LESS PAYROLL TAXES

10. CORPORATION • DISADVANTAGES • DOUBLE LAYER OF TAXATION • TAX ON EXCESS RETAINED EARNINGS • PRORATA EARNINGS DISTRIBUTION • MORE ADMINISTRATION • STATE FILINGS REQUIRED

11. SUBCHAPTER “S” CORPORATION • ADVANTAGES • ONE LEVEL OF TAX • LIMITED LIABILITY • LESS PAYROLL TAXES • LOSSES PASS THROUGH (UP TO ‘BASIS’)

12. SUBCHAPTER “S” CORPORATION • DISADVANTAGES • LOTS OF RULES • ONE CLASS OF OWNERSHIP • NEED “BASIS” FOR LOSSES • PRORATA DISTRIBUTIONS • LIMITED ACCESS TO CAPITAL • STATE FILINGS REQUIRED

13. LIMITED LIABILITY COMPANY LLC LIMITED LIABILITY PARTNERSHIP LLP • ADVANTAGES • SINGLE LEVEL OF TAXATION • LOSSES PASS THROUGH • LIMITED LIABILITY • ADMINISTRATION BY AGREEMENT • BROADER OWNERSHIP ALLOWED

14. LIMITED LIABILITY COMPANY LLC LIMITED LIABILITY PARTNERSHIP LLP • DISADVANTAGES • SELF EMPLOYMENT TAX • NEW TYPE ENTITY, NOT MUCH CASE LAW • STATE FILINGS REQUIREMENTS

15. WHICH TO CHOOSE? • SOLE PROPRIETORSHIP OR GENERAL PARTNERSHIP • LITTLE CAPITAL REQUIRED • NO LIABILITY PROTECTION REQUIRED • LIMITED ASSETS AT RISK • NO SALE OF BUSINESS ANTICIPATED

16. WHICH TO CHOOSE? • “C” CORPORATION • LIMITED LIABILITY DESIRABLE • PASS THROUGH INCOME IS NOT DESIRED • LARGE GROWTH ANTICIPATED • BROAD OWNERSHIP DESIRED • BROAD ACCES TO CAPITAL DESIRED • FUTURE SALE OF BUSINESS POSSIBLE

17. WHICH TO CHOOSE? • “S” CORPORATION WHERE: • BUSINESS WILL REMAIN RELATIVELY SMALL • CAPITAL IS RETAINED FOR GROWTH • NO SIGNIFICANT INVESTMENT IN APPRECIABLE ASSETS • LIMITED LIABILITY DESIRABLE • NO SPECIAL OWNERSHIP REQUIRED • SINGLE LEVEL OF TAXATION

18. WHICH TO CHOOSE? • LIMITED LIABILITY COMPANY • LIMITED LIABILITY IS DESIRABLE • HOLDS APPRECIABLE ASSETS • SPECIAL OWNERSHIP REQUIREMENTS • PASSIVE ACTIVITY • DISPROPORTIONATE DISTRIBUTION