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Overview of Business Entities. Scott D. Laufenberg Kerrick Stivers Coyle, PLC. Key Issues in Selecting a Business Entity. Formalities – whether there are legal requirements to create the entity and to maintain it Tax benefits – whether the entity has more favorable tax treatment than others

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overview of business entities

Overview of Business Entities

Scott D. Laufenberg

Kerrick Stivers Coyle, PLC

key issues in selecting a business entity
Key Issues in Selecting a Business Entity
  • Formalities – whether there are legal requirements to create the entity and to maintain it
  • Tax benefits – whether the entity has more favorable tax treatment than others
  • Liability protection – i.e., is a owner personally liable for debts of the business?
common types of business entities
Common Types of Business Entities
  • Sole Proprietorships – 1 owner
  • Partnerships – 2 or more owners called partners
  • Limited Partnerships – at least 2 owners of which 1 must be a general partner and the other must be a limited partner
  • Corporations – 1 or more owners called shareholders or stockholders
  • Limited Liability Companies – 1 or more owners called members
sole proprietorships
Sole Proprietorships
  • 1 owner
  • Often the owner uses an assumed name for the business (e.g., John Doe d/b/a Doe Roofing)
  • No formalities to create or maintain
  • Provides great flexibility – i.e., no requirements as to how the business is managed internally
  • All business income is reported on the owner’s personal income tax returns
  • No liability protection for the owner
partnerships
Partnerships
  • Requires 2 or more partners
  • Relationship between partners should be based upon a written partnership agreement
  • Revised Uniform Partnership Act
    • Addresses issues not include in the partnership agreement
    • By default, profits are shared equally, but losses are split in proportion to ownership interests
  • Business profits or losses are reported on Schedule K-1s issued to partners
partnerships1
Partnerships
  • No liability protection – i.e., the partners are personally liable for the business’s debts
  • Ends upon the departure or death of a partner
  • Each partner is an agent of the partnership – i.e., can unilaterally act on behalf of the business unless a third party knows differently
limited partnerships lps
Limited Partnerships (LPs)
  • Variant of a partnership and a corporation
  • Requires at least 1 general partner and 1 limited partner
  • Relationship between general partners and limited partners should be based upon a written partnership agreement
  • Formalities:
    • Formed by filing a Certificate of Limited Partnership with the Kentucky Secretary of State and County Clerk
    • File annual reports with the Kentucky Secretary of State
limited partnerships lps1
Limited Partnerships (LPs)
  • General partners:
    • Responsible for management
    • Personally liable for business’s debts
  • Limited partners:
    • No right to participate in management
    • Have limited liability
    • Can loose limited liability if they actively participate in the business
  • Business profits or losses are reported on Schedule K-1s issued to partners
  • LPs are also subject to the Kentucky annual limited liability entity tax based upon Kentucky gross receipts or gross profits (min. of $175)
corporations

Officers

Directors

Shareholders

Corporations
  • Overall structure:
corporations1
Corporations
  • Requires 1 or more shareholders
  • Shareholders have limited liability
  • Shareholders generally have voting rights but are not actively involved in the day-to-day operation of the business
  • The Board of Directors is elected annually by the shareholders at the corporation’s annual meeting
  • The Board of Directors elects the officers to handle the day-to-day operation of the business
  • The Directors and Officers owe duties to the shareholders and can be personally liable to the shareholders
corporations2
Corporations
  • Formalities:
    • Formed by filing Articles of Incorporation with the Kentucky Secretary of State and County Clerk
    • File annual reports with the Kentucky Secretary of State
    • Hold annual shareholder meetings and Board of Directors meetings
  • The Board of Directors adopts the corporate by-laws, which outline the internal structure of the business
corporation
Corporation
  • Taxation:
    • C corporation
      • Corporation pays federal income tax AND
      • Shareholders pay federal income tax on dividends
      • RESULT: DOUBLE TAX
    • S Corporation
      • Applies to qualifying corporations with 100 or fewer shareholders, and that meet other requirements
      • Election must be made to obtain this status
      • Eliminates the corporate level of taxation
limited liability companies llcs
Limited Liability Companies (LLCs)
  • Variant of a partnership and a corporation
  • Requires at least 1 member
  • Members have limited liability
  • Offers unprecedented structural and tax flexibility
  • Formalities:
    • Formed by filing Articles of Organization with the Kentucky Secretary of State and County Clerk
    • File annual reports with the Kentucky Secretary of State
    • May have annual or special meetings of the members
limited liability companies llcs1
Limited Liability Companies (LLCs)
  • Structural flexibility – management options:
  • Member-managed (like a partnership)
  • Manager-managed (like a LP)
  • Corporate-style
  • Operating Agreement – signed by the members and outlines the internal operating structure of the LLC
limited liability companies llcs2
Limited Liability Companies (LLCs)
  • Tax flexibility – are permitted to choose how the LLC will be treated for federal income tax purposes
    • 1 member – options:
      • Disregarded entity (default)
      • C corporation
      • S corporation
    • 2 or more members – options:
      • Partnership (default)
      • C corporation
      • S corporation
  • LLCs are also subject to the Kentucky annual limited liability entity tax based upon Kentucky gross receipts or gross profits (min. of $175)
planning for the unexpected buy sell agreements
Planning for the Unexpected: Buy/Sell Agreements
  • Provide a framework for changes in ownership
    • Involuntary changes – death, disability, divorce, bankruptcy, etc.
    • Voluntary changes – retirement, sales to others
  • Limit the ability of owners to bring in new owners without everyone’s consent
  • Typically address:
    • Who can buy
    • How the value of the ownership interest is calculated
respect the entity
Respect the Entity
  • Set up accounts in the legal name of the business
  • File annual reports, if applicable
  • Hold annual meetings and memorialize with minutes
  • Do not undermine the time, effort, and expense of setting up the business structure by ignoring it
  • Failing to respect the entity can result in loss of limited liability for the owners
resources
Resources
  • Kentucky Secretary of State
    • http://www.sos.ky.gov
  • IRS Small Business and Self-Employed Tax Center
    • http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed
  • Kentucky Department of Revenue
  • http://revenue.ky.gov/business/
questions
Questions?
  • slaufenberg@ksclawfirm.com
  • 270-782-8160