Corps, Fed IDs, Why Me?

Transcription

1 Corps, Fed IDs, Why Me? THE BUSINESS OF INNOVATION F R E E F O O D a n d F R E E F I N A N C I A L A D V I C E

2 Choice of Entity Understanding the Pros and Cons of Entity Types

3 Available Entity Types 4 Basic Entity Types No-Entity Sole Proprietorship Partnership Corporation Limited Liability Company Special Entity Types Professional Corporation Professional LLC Limited Liability Partnership Not-for-Profit Corporation Trust Limited Partnerships

4 Overview There is no one right answer How various aspects of a client s business fit together will determine what entity type or types are most appropriate Taxes Exit Strategy Cost Investors Liability Succession Business History Control

5 Sole Proprietorship If an individual starts a business without forming an entity, they are a sole proprietor No separate legal entity Filing a d/b/a does not form an entity Sole proprietors are personally liable for all of the obligations of their business No or little formation expense Insurance can offset many risks Can be an inexpensive way to test the waters

6 Partnership Two or more people sharing profits of a business No filing required to form the partnership, but d/ b/a filing is required to avoid fines Partnership is a separate legal entity from the partners It can own assets It can sue and be sued It can enter into contracts Every partner has apparent authority to bind the partnership

7 Partnership - Pros Little required formation expense Partnership does not pay income tax as an entity (single level of taxation) Partnership must file state and federal tax returns Partners pay taxes on their share of the partnership income or loss Tax is due even if income not paid to the partner Great flexibility Easy to add or remove partners Can agree on different ways to divide profits and losses Opportunity to structure transactions between partners and partnership in tax favored ways

8 Partnership - Cons A comprehensive Partnership Agreement can be expensive to draft; contains provisions regarding: Voting Rights Retirement Disability Withdrawal Transferability of Ownership All partners are JOINTLY AND SEVERALLY liable for the obligations of the partnership Every partner has a common law right to withdraw from the partnership May be a breach of contract giving rise to a damage claim Withdrawing partner entitled to payment of the fair value of his or her partnership interest Under proper circumstances a partner may be entitled to an accounting Every partner has apparent authority to act on behalf of the partnership

9 Special Partnership Types Limited Partnerships One or more General Partners GP s are traditional partners GP s run the business, subject to the partnership agreement One or more Limited Partners LP s are not personally liable for partnership obligations LP s have little or no control of the business Useful in certain estate planning and investment situations Limited Liability Partnerships Created by statutory provision to allow existing partnerships to convert to a LLC like structure Governed by the partnership law Partners not personally liable for debts of the partnership, except personal professional liability Only available to professionals

10 Corporations Formed by: Filing a Certificate of Incorporation with the Secretary of State - Filing Fee Adopting by-laws Appointing directors Issuing Stock - Minute book, seal & stock cert. Appointing Officers Shareholders own the corporation Directors are elected by shareholders Directors govern the corporation Officers are appointed by directors Officers handle the day to day business of the corporation

11 Corporation Pros Shareholders are not liable for the obligations of the Corporation Rights of shareholders are clearly defined by law Shareholder rights can be limited or expanded in Certificate of Incorporation Generally no right of withdrawal or accounting Shareholders are only taxed when stock sold or dividend received

12 Corporation Cons Double taxation of corporate profits Shareholders have dissenter rights in certain situations Can require corporation to repurchase stock if corporation takes certain actions Court can end up determining purchase price Minority shareholders can force dissolution in certain situations Majority shareholder must treat minority shareholders fairly and per terms of Bylaws & Certificate of Incorporation NY 10 largest shareholders are personally liable for wages Separate Shareholder Agreement needed to restrict transferability of shares

13 Special Corporation Types S-Corporation This is a tax election, not a different type of entity Corporation does not pay tax eliminates double taxation Corporation files federal and state tax return Corporation pays NY franchise tax Shareholders pay tax on their share of corporation s income even if no dividend paid No foreign or corporate shareholders allowed Limited number of shareholders allowed (100) Professional Corporation PC Only available for professionals Only licensed professional can own stock Shareholder remains liable for personal professional liability

14 Limited Liability Company Formed by: Filing Articles of Organization with the Secretary of State Adopting an Operating Agreement Publishing a Notice of Formation in 2 newspapers Filing a Affidavit of Publication with the Secretary of State Members own the LLC LLC may be managed by Manager(s) or Members Election must be in Articles of Organization If managed by members, all members have apparent authority If managed by manager(s), no apparent authority NY LLC Law gives extreme flexibility on structuring an LLC Can make it look like a partnership Can make it look like a Limited Partnership Can make it look like a Corporation

15 LLC Pros Single Level of Taxation If only one member disregarded for tax purposes (taxed like a sole proprietor) If multiple members taxed as a partnership Limited Liability Members are not personally liable for obligations of the LLC Flexibility to: Create classes of Members Divide profits and losses Create or limit rights Grant preferred or guaranteed returns No common law right of withdrawal No dissenter rights No Member liability for wages Operating Agreement controls virtually all aspects of ownership

16 LLC Cons Multiple Member Operating agreement is a complex agreement that can be expensive to draft and negotiate with all Members Some tax issues remain unsettled Financial investors may not want passthrough taxation Annual franchise fee can be expensive if there are many members (Fee calculated on a per member basis)

17 Special LLC Types Professional Limited Liability Company Only available for professionals Only licensed professional can be members Members remain liable for personal professional liability Limited Liability Partnership In New York this is a type of partnership not a LLC In some states, this is the name given to LLCs

18 Summary Entity choice can be used to limit personal liability LLC, Corporation, Limited Partnership (but only for the limited partners) Multiple entities can be used to compartmentalize liability Entity choice can reduce taxes paid Pass through or single level of tax S-Corp Sole Proprietor LLC Partnerships Limited Partnerships Entity level taxation Corporation (C-Corp) Entity choice can help owners control the future of their business Limit transferability Eliminate ability to withdraw Avoid dissenter and minority ownership issues Establish rules for retirement, disability, etc

19 THE BUSINESS OF INNOVATION Upcoming Events October 23 Recordkeeping #Boring #SorryNotSorry How to keep clean books November 12 Show Me The Money! Procuring Funding Presented with First Niagara December 10 TAXivus: Incentives For The Rest Of Us Tax planning & credits and incentives January 14 Fraud It Can Happen To You! Types of fraud and how to prevent and detect it February 11 Red Bull & Ramen: A Startup Survival Story Zach Schneider of 15 Fingers shares his startup story w w w. L u m s d e n C P A. c o m

20 Cory Van Deusen Lumsden McCormick Christopher Berardi Lippes Mathias Wexler Friedman, LLP