Category: Choice of Entity (Page 1 of 2)

Updates to IRS Tax Partnership Audit Rules

There are changes coming to any business operation that is currently taxed as a partnership in the United States. The concept of the “tax matters partner” is being done away with in favor of what is called a “partnership representative.” 

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Partnership Taxation: Substantial Economic Effect @ Paper This Deal

Partnership taxation is a complex area of tax law. We’ll be walking through some of the issues you should be aware of.

The first is to ensure you are getting the deal you thought you were.  Partners (or LLC members where the LLC has multiple members and does not “check the box“) can agree on how to allocate the profit and losses of the business as they see fit in the agreement.  The allocations can be done in any manner the partners/members choose, provided that the allocations have “substantial economic effect.” See IRC 704(b); Treas. Reg. 1.704-1(b).

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S Corporations: Losing S-Corp Status Due to Passive Income

Owners of corporations elect S corporation taxation status for the pass through and other benefits the election provides. There are various things that can arise that would cause an S corporation to lose its election.  In this and following posts, I’ll walk through some of the most common.  The one I want to discuss now is the S corporation passive income restriction. 

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S Corporations: Electing to be taxed as an S Corporation

I’m going to be posting a number of posts on the ins and outs of electing and operating a corporation which elects to be taxed as a small business corporation (an “S Corp”) with the IRS.  There are many benefits to such an election, but there are also pitfalls that many owners run into that could jeopardize the election.

The first post in this series is simply how to make the election.

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Domestic International Sales Corporations @ Paper this Deal

If you export products for sale of any type and don’t know what an IC-DISC (or simply a DISC) is, or think it’s a round piece of plastic you put in your computer’s drive, then keep reading.  Any United States business with qualifying export sales can save a large amount of money with the use of a Interest Charge Domestic International Sales Corporation (referred to hereinafter as a “DISC”).

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Tax Treatment of S-Corp Payments to Shareholders @ Paper this Deal

Shareholders who are employed by a corporation which has elected to be taxed as an S-Corp wear two hats.  They are investors in the entity (they contributed capital to get their shares initially) and allowed to get a return on their capital, and they are employees who receive wages.  When an owner/employee of an S-Corp (or an LLC which is taxed as an S-Corp) is on a salary from the S-Corp, the wages payable are subject to employment taxes, and distributions made to the owner of the S-Corp are not subject to employment taxes.  Also if the S-Corp was loaned money by the shareholder, the S-Corp can make payments to repay the loan to the shareholder, and these payments will not be subject to the employment tax.  Misclassifying payments as distributions or loan repayments, when they really should be wages can lead to an audit from the IRS.

In a recent case from the United States Tax Court (Glass Blocks Unlimited, TC Memo, 2013-180),

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Series LLCs @ Paper this Deal

If you are one of those people who is tired of having to form seperate entities (LLCs or corporations) for each type of business you operate, or for each piece of real estate that you own, a Series LLC may be useful to you. Nearly a decade ago, the state of Delaware introduced a legal entity that would become known as the Series LLC. Despite its origins in Delaware, several other states have now started to permit the usage of Series LLCs. 

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Benefit Corporations (B-Corps) & Other “Good Vibe” Corporate Structures @ Paper this Deal

It used to be that if you wanted to start a corporation and the end goal was not to maximize shareholder value (or other typical corporate goals), you’d start a not-for-profit corporation.  That’s no longer the case. Now in New York (and at least six other states) you can form a Benefit Corporation (a “B-corp”) which has other purposes besides making money.  There are also other strategies you can use in a for-profit company to give it more of an egalitarian feel.  We’ll discuss below.

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How to form a Single Member LLC in New York State @ Paper this Deal

There are a lot of small businesses out there operating as sole proprietorships, that is they operate the business through the individual(s), and there is no formal entity.  Many sole proprietors tell me that they’ve filed a d/b/a with the local county (here, the counties of Onondaga, Tompkins or Monroe), and therefore believe that is all they need to ensure that they are not personally liable, but this is not correct.

The main reason people incorporate or organize LLCs is to limit liability.  Debts and contractual obligations are not something that you want to owe personally if you can avoid it.  Setting up an LLC will create a seperate legal entity from yourself that you will operate the business through, own business assets, and contract through.  Not much has to change when you form a single member LLC.  LLC’s are also useful because the IRS will let you choose how you want the LLC taxed (either as a disregarded entity, S corp or C corp).

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IRS’s “Check the Box” Regulations for LLCs @ Paper this Deal

There are many reasons why LLCs can be great for business owners.  For those types of businesses that have revenue and don’t need outside investors or to issue stock options (although LLC profits interests can work), LLCs are a good choice.

For a lot of startup companies, a corporation may be the right choice, especially if it will be seeking investors, plans to be acquired by a larger player in the industry at some point, or would like to have an IPO or other offering. The choice for a lot of companies especially in the high tech sector is the corporation. But if those aren’t your goals, if you have a business plan, target market, product and are ready to sell and make revenue then an LLC may be the right choice for you. Whatever industry you are in, an LLC can be a beneficial entity to use. LLCs can do complex and sophisticated things with respect to splitting profits, can have interesting classes and structures, require less paperwork than would a corporation, and are by far more flexible. (I’ve kind of beat the LLC v. Corp. horse to death earlier so will get to the point now). One of the other great advantages of the LLC form is that it can elect (i.e. choose) to be taxed as either disregarded entity (if one member then a sole proprietorship, and if multiple members than a partnership), an S-corporation or a C-corporation.

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