OUT IN FRONT LLC OR INC.? ENTITY SELECTION FOR A SMALL TO MEDIUM SIZED BUSINESS S CORPORATIONS IN DETAIL

Transcription

1 OUT IN FRONT LLC OR INC.? ENTITY SELECTION FOR A SMALL TO MEDIUM SIZED BUSINESS S CORPORATIONS IN DETAIL Presented by: William C. Perez Adams and Reese LLP December 17, 2013

2 Topics to be Discussed: Why Choose an S Corporation? Pros and Cons of Using S Corporations (or any limited liability entity for that matter) S Corporation vs. LLC Pros & Cons Determining if an S Corporation is Right for You or Your Client Establishing the S Corporation Management of the S Corporation Dissolution and Termination

3 S Corporation vs. LLC Pros & Cons Formation Requirements LLC File Articles of Organization/Formation with state. Very simple can be 1 page online File Articles of Incorporation with state * Certain financial institutions, insurance companies, domestic international sales corporations, certain corporations that use the possessions tax credit, C-corps that have been S-Corps within the last 5 years are ineligible for S-corp election Primary Governance Document Operating Agreement contractual Articles of Incorporation, Bylaws statutory Shareholders Agreement - contractual Different Classes of Securities Yes No (may have voting and non-voting) Limitation on Members/Shareholders No any person or entity may be a member Yes no foreign persons no corporate or LLC shareholders limited to 100 shareholders (spouse of a shareholder is considered a separate shareholder) only individuals, estates, exempt organizations or certain trusts Operational Freedom Yes - total flexibility based on contractual arrangement between members (usually defined in Operating Agreement Not nearly as much; heavily reliant on statutes for corporate governance

4 Allocation of Profits/Losses Recordkeeping LLC Yes allocations may be made according to member agreement Arguably less but all entities should engage in good consent and resolution practices in cases of important and/or out of ordinary course decisions No allocation must be pro rata based on ownership Arguably more; certainly more formalized by statute (e.g., minutes of meetings, shareholder/director consents, etc.) Personal Liability Administrative Requirements Members are not typically held liable for acts of the Company. Relatively few requirements. Annual report is required to be files with state of organization. Shareholders are not typically held liable for actions of the corporation Election of board of directors/officers, annual meetings, and annual report filing requirements. Management Members can set up structure as they choose. Shareholders elect directors Directors appoint officers to manage business activities. Term Transferability of Interest Perpetual, unless state requires fixed duration. Possibly, depending on restrictions outlined in the operating agreement. Transfer of more than a 50% interest can trigger the termination of the entity Perpetual; can extend past death or withdrawal of shareholders. Yes, but must observe regulations on who can own S-corp stock. Freely transferred without triggering adverse tax consequences.

5 Capital Raising LLC Sale of membership interests or equity securities are generally subject to the provisions of the Operating Agreement Securities laws may also apply Investors less comfortable with LLC/partnership form of organization Sale of stock is subject to shareholder limitations Investors comfortable with corporate form of organization Taxation DISCLAIMER: I AM NOT A TAX LAWYER AND HAVE NO INTEREST IN BEING ONE. FOR ANY TAX QUESTIONS, YOU MUST CONSULT WITH YOUR TAX ATTORNEY OR ACCOUNTANT! No tax at the entity level. Pass through taxation. Able to deduct pre-tax expenses. No tax at the entity level. Pass through taxation. Able to deduct pre-tax expenses. Treated and taxed in the same manner for Louisiana income tax purposes as treated and taxed for federal income tax purposes (i.e., if LLC is taxed as a corporation for federal income tax purposes, it will be taxed as a corporation for Louisiana income tax purposes; if considered a partnership for federal income tax purposes, then it is treated as a partnership for Louisiana income tax purposes). Shareholders who are Louisiana residents are required to file a Louisiana individual income tax return to report their portion of the income derived from the activities of the corporation. Double Taxation No No Limited Liability Yes Yes

6 LLC Self-Employment Tax Yes full Social Security & Medicare (15.3% of earnings for 2014) as of January 2013, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes No 15.3% Social Security & Medicare on salary paid but not on distributions salary must be within normal range for similar positions Corporate Tax Election Tax Forms Yes (file Form 2553) - elect to be taxed as an S-corp while retaining the structure of an LLC Single member (disregarded entity treated as a sole proprietorship) - Form Schedule C Multi-member (taxed as partnership) - Form 1065, Members issued K-1 N/A Form 1120S Shareholders issued K-1 for personal tax returns. Required Time to File No, may form an LLC at any time during the year Yes For existing C-Corps or LLCs electing to be treated as an S-Corp must file Form 2553 with the IRS by March 15th of any given calendar year to be treated as an S-Corp for that tax year forward. For newly formed entities, 75 days following the date of organization Franchise Tax Usually no; most states have a low annual fee (no franchise tax in Louisiana) Yes (same as C-Corps in Louisiana)

7 LLC Risk of UBTI (Unrelated Business Tax Income) Ease of Conversion to C-Corp Yes Maybe; depends on state of organization; some states have a simple conversion statute (such as Delaware) but it is still considered a merger so fees and expenses could be high No Yes uncheck the box making the S-election for following tax years Passive Income Limitation No Yes - No more than 25 percent of gross receipts may be from passive activities (ex. real estate investment) Termination of S-Corp Status N/A unless LLC has elected to be taxed as a corporation and has made an S-election. If so, see next. An S-Corp may voluntarily revoke its status if it finds that S status is no longer beneficial by vote of a majority of the stockholders and notice to the IRS Also, any act which disqualifies the corp s eligibility for S status will result in the termination of the S-election effective on the date that the disqualifying event occurs M&A Considerations No more than usual There are some unique tax circumstances that could subject sellers to additional taxes on sale/merger Ex., when a C-Corp converts to an S-Corp or an S-Corp acquires assets from a C-Corp in a taxfree transaction, it may be subject to a corporatelevel built-in gains tax in addition to the tax imposed on its shareholders

8 William C. Perez Adams and Reese LLP One Shell Square 701 Poydras Street, Suite 4500 New Orleans, LA Tel: (504) Fax: (504) The contents of this presentation are intended for general information purposes only. Application of the information reported herein to particular facts or circumstances should be analyzed by legal counsel. Adams and Reese LLP is a registered limited liability partnership. Neither the firm nor the presenter assume liability for the use or interpretation of information contained herein.