Comparison of common business entities:

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2 Business Planning Comparison of common business entities: /11/2016 Sole proprietorship General partnership Limited partnership C Corporation S Corporation Business owned by Sole proprietor Partners Partners Shareholders Shareholders Members Number of owners One Two or more One or more general and one or more ltd partners Owners have personal liability for business obligations Who makes management decisions What happens upon death or departure of owner Ownership transfer Legal formalities Yes Yes General partners only Sole proprietor Partners General partners Board of directors and officers Terminates By sole proprietor (unrestricted) Minimal; registration with state Terminates unless partnership states otherwise Governed by operating (generally with consent of all partners) Minimal; operating ; registration with state Terminates unless partnership states otherwise Governed by operating (generally with consent of all partners) Initial filing with state; operating Limited Liability Company (LLC) Unlimited Up to 100 Unlimited No No No Board of directors and officers Members or managers Continues Continues Continues unless LLC or state law states otherwise Stock transfer (securities law or shareholder may restrict) Initial filing articles, bylaws, minutes of meetings Source of capital Sole proprietor Partners Partners Stockholders and bond holders Income taxes Who deducts losses Are benefits deductible for active owners Entity works best for whom owner on Schedule C of Form 1040 Sole proprietor can deduct from active business income Sole owner: minimal rules; owner assumes personal liability partners on Schedule K-1 of Form 1065 Partners, subject to passive income rules Multiple owners: minimal rules; partners assume personal liability partners on Schedule K-1 of Form 1065 Partners, subject to passive income rules Multiple owners: minimal rules; general partners assume personal liability, limited partners have limited liability; pass through tax status without forming LLC corporation on Form 1120 Corporation Many fringe benefits like stock option and bonus s - medical and life insurance One or more owners: limited liability; tax at corporate and shareholder levels provides way to reduce overall taxes by splitting income taxes; fringe benefits for owners Stock transfer (securities law or shareholder may restrict) Initial filing articles, bylaws, minutes of meetings Stockholders and bond holders; only one class of stock shareholders on Schedule K-1 of Form 1120S Passed through to shareholders One or more owners: limited liability; pass through tax status with the formal structure of a corporation; fringe benefits limited for >2% owners Governed by operating (generally with consent of all members) Initial filing with state; operating Members Taxed according to entity elected Varies with entity elected but can deduct medical insurance & set up IRA or Keogh retirement, unless elect corporate tax status Owners who want limited liability and pass through tax status without formalities of corporate structure This chart provides a general summary and comparison of certain characteristics of common business entities; it should not be relied upon to make business, legal, or tax decisions.

3 Estate Planning Planning for digital assets. Recent advancements in technology and widespread adoption of digital storage platforms and mobile device use have resulted in an increasing amount of personal intangible property held or otherwise existing solely in a digital format. Some digital assets may have significant value for professionals such as authors, inventors, artists, photographers, etc. Special attention should be paid to ning for such property. For most individuals, though, while digital property may have minimal monetary value, access is still crucial for an appointed fiduciary to fulfill his or her responsibilities. Such property may include online/cloud storage accounts (for items such as photographs, videos, music files, etc.), website domains, social media accounts, , and online banking and other financial accounts. Furthermore, many financial accounts are accessed and maintained exclusively online, where paperless statements leave the account known only to the account holder. Lastly, some digital property may have specific sentimental value for heirs or is otherwise worthwhile to business successors and partners for reputational purposes. The question for testators is therefore to what extent such accounts and assets are devisable, as well as the best way to do so. For heirs and executors alike, the question is generally how can they discover the existence of accounts, and obtain authority to gain access to and control over such property. The Uniform Fiduciary Access to Digital Assets Act (UFADA) ( Uniform Act or Act ) was approved by its drafting committee in 2014 to provide a standard for states to modify state property codes to account for digital assets. Most states currently do not grant fiduciary access /11/2016 specifically to digital assets, but the Uniform Act was designed to define the scope of digital property, as well as to provide rules for fiduciary access including executors, guardians, agents and trustees. A central contention during drafting of the Act involved the extent to which service providers could shape their terms of service s to preclude fiduciary access. (For example, Google currently permits the designation of an individual to have post mortem access through its Connection Account Manager, whereas Facebook has been adamant about refusing fiduciary access.) The Act generally settled on a provision that permits individuals to opt out of fiduciary access, providing for a digital death by affirmative election. It is important to note as well that the Act only applies to fiduciaries a family member who wants access but is not otherwise a fiduciary is not covered. Until state laws are clarified or modified based on guidance provided by the Uniform Act, it is important to know that federal privacy and computer fraud laws may make a service provider hesitant to grant a fiduciary access to an online account. Furthermore, fiduciaries may unknowingly violate federal computer fraud laws if their access (even with user consent) violates the service provider s terms of service. For this reason, it is important for a fiduciary to consult with an attorney specializing in such matters where an open question exists. While few states have yet to enact legislation, there are significant differences between the states that have. Notably, Delaware enacted many provisions in line with the Act at about the same time the uniform law was approved. Conversely, Virginia passed legislation thereafter that adhered to a competing model act crafted largely by representatives of the technology industry, which is far more restrictive for fiduciaries. Individuals concerned with providing fiduciary access to their online accounts have several ning options to consider: Grant fiduciaries specific access to digital accounts under terms of applicable will, trusts, or power of attorney. Review terms of service of certain sensitive accounts for policy regarding fiduciary access (if any) if a specific appointment with service provider is required or available, consider doing so. Keep passwords someplace safe, yet accessible, to a trusted individual or designated fiduciary possibly a safe deposit box. (Of course, some passwords change, either by choice or necessity, so it may be cumbersome to keep such lists entirely up to date; certain online services may be available for personal list storage as well.) Keep storage devices housing digital only records (tax returns, financial records, digital media, etc.) in safe place along with passwords, or otherwise include passwords for password protected documents otherwise located on personal computer, cloud account, etc. For situations where one wishes that the account die with the individual, consider reviewing options or elections with service provider that provide for an automatic termination/deletion of account information upon death. Note that digital files held on thirdparty sites (such as itunes), in spite of substantial investments in such files, may not be transferable to heirs under the standard terms of service that apply to such accounts.

4 Retirement Planning Beware of prohibited transactions in self-directed IRAs. Summary. A U.S. Court of Appeals 1 affirmed a decision of the U.S. Tax Court that an individual retirement account (IRA) owner whose business was owned 98% by his self-directed IRA was engaged in a prohibited transaction by receiving compensation for services rendered to the IRA-owned business. Facts. In 2005, Mr. Ellis formed CST Investments to engage in the business of used car sales. Using money rolled over from his 401(k) to his IRA, the IRA purchased an interest in CST, a limited liability company, which afterwards had two members: IRA with 98% ownership and a Mr. Brown with 2% ownership. The CST operating designated Mr. Ellis as general manager and gave him full authority to act on behalf of the company. The operating also provided that the general manager was entitled to certain guaranteed payments as approved by the members. By the end of 2005, the IRA had a fair market value of $321,253, consisting of its membership interest in CST and $1,773 in cash. To compensate Mr. Ellis for his services as general manager, CST paid him a salary of $9,754 in 2005 and $29,263 in The wages were drawn from CST's corporate checking account and were reported as income on Mr. Ellis's tax return for both years. Effectively, Mr. Ellis had the ability to direct payments to himself In 2011, the IRS issued a notice of deficiency to Mr. Ellis, identifying an income tax deficiency, together with an accuracy-related penalty and late-filing penalty. Mr. Ellis filed a petition in Tax Court to contest the notice of deficiency. Ruling. The Tax Court upheld the tax deficiency and penalties, agreeing that Mr. Ellis engaged in a prohibited transaction by causing CST to pay wages to him in The Court of Appeals affirmed the Tax Court s decision. Reasoning. The Internal Revenue Code Section 4975 restricts allowable transactions for certain retirement s, including IRAs. It does so by imposing an excise tax on certain prohibited transactions between a and a disqualified person. Prohibited transactions include transfers to or use by a disqualified person of the income or assets of a. A prohibited transaction also includes any act by a disqualified person in which he deals with the income or assets of a in his own interest or for his own account. Such transactions are prohibited even if they are made in good faith or are beneficial to the. If a disqualified person engages in a prohibited transaction with an IRA, the loses its status as an IRA; its assets are deemed distributed and included in the disqualified person's gross income as of the first day of the taxable year. The parties agreed that both Mr. Ellis and CST were disqualified persons with respect to the IRA. The only issue on appeal was whether the payment of wages to Mr. Ellis in 2005 was a prohibited transaction. The record establishes that Mr. Ellis caused his IRA to invest a substantial majority of its value in CST with the understanding that he would receive compensation for his services as general manager. By directing CST to pay him wages from funds that the company received from his IRA, Mr. Ellis was deemed to have engaged in the indirect transfer of the income and assets of the IRA for his own benefit and indirectly dealt with such income and assets for his own interest or his own account. Comments. Self-directed IRAs have become increasingly popular with certain IRA owners who wish to invest their IRA funds in certain alternative investments other than the typical investments of stocks, bonds, mutual funds, CDs, and annuities. These alternative investments often include real estate, precious metals, private company stock, private mortgages, oil and gas limited partnerships, horses, and intellectual property. Self-directed IRAs are generally administered by a trustee or custodian who has custody and control of the assets and performs various administrative functions. When, as shown in the Ellis case, the IRA owns a closely-held business, it is important to avoid any unauthorized distributions or other activities that can be considered a prohibited transaction. 1 Ellis v. Comm r, 115 AFTR 2d (787 F.3d 1213) (CA8), 6/5/2015.

5 Life Insurance Planning Qualified Longevity Annuity Contracts add flexibility for retirement distributions. On July 1, 2014, the Internal Revenue Service (IRS) and the U.S. Treasury Department released finalized regulations regarding longevity annuities and their application to defined contribution qualified retirement s and individual retirement accounts (IRAs). Prior to the final regulations, longevity contracts were not used in defined contribution s or IRAs. As a result of the final regulations, individuals now have greater flexibility to align retirement income needs with distributions since IRAs and certain qualified retirement s can now invest in Qualified Longevity Annuity Contracts (QLACs) without running afoul of required minimum distribution (RMD) requirements. Generally, under the RMD rules of Internal Revenue Code 401(a)(9), individuals must begin taking annual withdrawals from qualified retirement s and IRAs at age 70½. RMDs from qualified retirement s or IRAs are taxed at ordinary income rates. RMDs are calculated by dividing the account balance by a life expectancy factor. Prior to the regulations, deferred annuities were not a suitable investment for defined contribution s and IRAs since the present value of the annuity s benefit was required to be included in the individual s RMD calculation with no offsetting income (during the deferral period) to pay the resulting tax. The new regulations open the door for defined contribution s and IRAs to invest in deferred annuities since the value of a QLAC will be excluded from an individual s account balance for the purposes of determining RMDs. As a result, QLACs can be used to defer required annuity payments beyond an individual s age 70½ without violating the RMD rules. Annuity payments from a QLAC can begin as late as age 85 (though payments could begin earlier under the terms of the contract). For individuals who do not need RMDs for ongoing retirement income needs, the ability to defer the income tax liability resulting from RMDs may reduce current income tax liability. QLACs also may be useful to individuals who don t necessarily need RMDs to support ongoing retirement income needs by providing those individuals with the flexibility to better for income needs later on in life when expenses may be appreciably higher. Longevity annuities are similar to immediate fixed income annuities in that they are funded with a single premium payment. However, unlike payments from an immediate fixed income annuity, longevity annuity payments do not begin immediately but instead start at a designated age. Since longevity annuity payments last for an individual s lifetime, a longevity annuity helps protect against the risk of outliving retirement assets. QLAC requirements: The QLAC must be purchased on or after July 2, A longevity annuity in existence before July 2, 2014, can be exchanged for a new contract after July 2, 2014, and will be considered a QLAC if all other requirements are met. The contract must specifically state at inception that it is intended to be a QLAC. The issuing company must file annual reports to the IRS and the contract holder regarding QLAC values and status. QLACs can be funded with money from IRAs and the following defined contribution s: 401(k), 403(b), and eligible governmental 457(b). The IRS placed limitations on the amount of qualified retirement or IRA money that can be used to invest in a QLAC. QLAC premiums are limited to the lesser of $125,000 (adjusted for cost-of-living increases) or 25% of the individual s account balance. The 25% limitation applies to qualified retirement s on a -by basis and to IRAs on an aggregate basis. Income payments must begin no later than the first day of the month following the owner s age 85. Income payment options can be single life only, joint life only, single life with cash refund, or joint life with cash refund. After payments begin, the payments must satisfy the RMD rules. The annuity contract must be a fixedrate deferred income annuity contract and the contract cannot have any cash surrender value or commutation benefit.

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