CHOICE OF ENTITY THE TAX DECISION Clare G. Cole CPA Adapted

CHOICE OF ENTITY THE TAX DECISION Clare G. Cole CPA Adapted by Southeastern MA Regional Small Business Development Center

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

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

KEY DIFFERENTIATORS PERSONAL LIABILITY PROTECTION TAX ADVANTAGES COST SIMPLICITY

SOLE PROPRIETORSHIP ADVANTAGES 1. 2. 3. SIMPLE, NO SEPARATE FILING NO STATE FILINGS LOSSES PASS THROUGH

SOLE PROPRIETORSHIP DISADVANTAGES 1. 2. 3. PERSONAL LIABILITY LIMITED ACCESS TO CAPITAL SELF EMPLOYMENT TAX

GENERAL PARTNERSHIP ADVANTAGES 1. 2. 3. SINGLE LEVEL OF TAXATION LOSSES PASS THROUGH SIMPLE ADMINISTRATION

GENERAL PARTNERSHIP DISADVANTAGES 1. 2. 3. PERSONAL LIABILITY LIABILITY FOR PARTNER’S COMMITMENTS LIMITED ACCESS TO CAPITAL

CORPORATION ADVANTAGES 1. 2. 3. 4. LIMITED LIABILITY ACCESS TO CAPITAL OWNER BENEFITS DEDUCTIBLE LESS PAYROLL TAXES

CORPORATION DISADVANTAGES 1. 2. 3. 4. 5. DOUBLE LAYER OF TAXATION TAX ON EXCESS RETAINED EARNINGS PRORATA EARNINGS DISTRIBUTION MORE ADMINISTRATION STATE FILINGS REQUIRED

SUBCHAPTER “S” CORPORATION ADVANTAGES 1. 2. 3. 4. ONE LEVEL OF TAX LIMITED LIABILITY LESS PAYROLL TAXES LOSSES PASS THROUGH (UP TO ‘BASIS’)

SUBCHAPTER “S” CORPORATION DISADVANTAGES 1. 2. 3. 4. 5. 6. LOTS OF RULES ONE CLASS OF OWNERSHIP NEED “BASIS” FOR LOSSES PRORATA DISTRIBUTIONS LIMITED ACCESS TO CAPITAL STATE FILINGS REQUIRED

LIMITED LIABILITY COMPANY LLC LIMITED LIABILITY PARTNERSHIP LLP ADVANTAGES 1. 2. 3. 4. 5. SINGLE LEVEL OF TAXATION LOSSES PASS THROUGH LIMITED LIABILITY ADMINISTRATION BY AGREEMENT BROADER OWNERSHIP ALLOWED

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

WHICH TO CHOOSE? SOLE PROPRIETORSHIP OR GENERAL PARTNERSHIP 1. 2. 3. 4. LITTLE CAPITAL REQUIRED NO LIABILITY PROTECTION REQUIRED LIMITED ASSETS AT RISK NO SALE OF BUSINESS ANTICIPATED

WHICH TO CHOOSE? “C” CORPORATION 1. 2. 3. 4. 5. 6. 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

WHICH TO CHOOSE? “S” CORPORATION WHERE: 1. 2. 3. 4. 5. 6. 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

WHICH TO CHOOSE? LIMITED LIABILITY COMPANY 1. 2. 3. 4. 5. LIMITED LIABILITY IS DESIRABLE HOLDS APPRECIABLE ASSETS SPECIAL OWNERSHIP REQUIREMENTS PASSIVE ACTIVITY DISPROPORTIONATE DISTRIBUTION